Lennar Q4 earnings posted this a.m., and part of the good news is that Lennar gutted out a tough-comping orders print of up 13% sequentially. The underlying story is that Lennar's masterful financial and operational management program and execution show through in the financials.
Here's a link to Bloomberg/BusinessWeek staffer Prashant Gopal's take, "Lennar Quarterly Profit Rises on Higher Sales and Prices."
Here's Gopal's note on Lennar orders:
Orders climbed 13 percent in the fiscal fourth quarter to 4,498 homes. Revenue rose to $1.92 billion from $1.35 billion a year earlier as the number of houses delivered increased by about 27 percent. The average sale price was $307,000, up 18 percent.
Focus for all the public builders in this earnings season is on orders, as investors and the broader business community tries to get a sense of directional momentum for the industry leading into 2014.
Here's a top line first reaction to the numbers from analysts who cover the home builders.
Michael Rehaut, JP Morgan
LEN reported 4Q (Nov-end) results featuring EPS of $0.73, solidly above our $0.61E and the Street’s $0.62 consensus. Upside to our estimate was driven by gross margins of 26.8%, strongly above our 25.0%E, which drove $0.09/share of upside, while slightly higher SG&A of 9.9% vs. our 9.8%E drove $0.01/share of downside. Additionally, higher Rialto operating earnings drove $0.03/share of upside. Lastly, orders (ex-JVs) rose 13%, modestly below our 18%E, but against a strong 32% year-ago comp. Net net, while these results are impressive, in our view, we expect the stock to have only a modestly positive reaction, as we note that solid upside to EPS consensus and solid to strong upside to gross margin expectations is similar to many other builders’ earnings reports over the last few months, while moreover, some investors may view current gross margins as peak, with limited incremental upside. We maintain our relative Neutral rating amid our positive sector stance as we believe LEN’s valuation, at 1.8x adjusted P/B, a 7% premium to its larger-cap peers’ 1.7x average, and 6.7x our 2016 Earnings Power, a 9% discount to its peers’ 6.1x average, appropriately reflects its above average fundamental profile.
• Orders (ex-JVs) up 13%, modestly below our 18%E. We note 4Q's order growth is only down slightly from 3Q's 15% growth and is against a comp of +32% in 4Q12 vs. a 44% comp in 3Q12. On a regional basis, West, Houston, East and Central rose 25%, 19%, 16% and 12%, respectively, while Other and Southeast FL fell 8% and 4%. Lastly, order ASPs (ex-JVs) rose 19% YOY to $320K.
• Core operating margins of 16.9% solidly above our 15.2%E. Gross margins of 26.8%, above our 25.0%E, rose 190 bps sequentially and 340 bps YOY. We note that incentives as a percentage of sales were 6.3% vs. 6.0% last quarter and 9.0% last year. Moreover, the company’s SG&A fell 30 bps sequentially and 140 bps YOY to 9.9%, slightly above our 9.8%E (homebuilding revenues grew 50%, in-line with our estimate, as while closings growth was slightly below our estimate, ASPs were slightly above). As a result, LEN’s core operating margin of 16.9% was above our 15.2%E, up 220 bps sequentially and 470 bps YOY.
• Net debt-to-cap declines. LEN ended the quarter with $695 million of cash, up from last quarter’s $452 million, and total debt of $4.2 billion, down from last quarter’s $4.6 billion, as the company converted $277 million of its 2.00% convertible senior notes during the quarter. As a result, net debt-to-cap fell 730 bps sequentially to 45.6%.
Adam Rudiger, Wells Fargo
LEN REPORTED Q4 EPS OF $0.73 VS. OUR $0.63 ESTIMATE. Consensus was $0.62. Upside to our estimate was largely driven by better than expected gross margin (26.8% vs. our 24.8% estimate) and higher Rialto income ($14MM vs. our $3MM estimate). Conversely, SG&A/home sales revenue (including corp. expense) of 12.4% was above our 11.7% estimate and financial services income of $17MM missed our $25MM estimate. Orders increased 13% yr/yr, below our 17% estimate and the consensus 16% estimate. Closings increased 27%, roughly in line with our estimate, while closing price increased 18%.
TAKEAWAYS: 1) LEN entered the quarter with community count up 16% yr/yr suggesting to us that most, if not all, of the yr/yr order improvement was due to increased community count. While we don't dismiss the significance of growing community counts, results don't indicate to us that there has been any meaningful organic pickup in demand. 2) Gross margins were particularly strong in our view, falling just 20 bps short of the peak gross margin in Q4 2005. Incentives/home sales revenue fell by 270 bps yr/yr contributing to some of the margin gain. However, although the change was minimal at just 30 bps, incentives increased sequentially, reversing a 6 quarter trend of declining incentives. 3) LEN provided some financial information on its multi-family segment for the first time this quarter. For the full year, revenues were just $15MM while the full year loss was $17MM. We don't expect this segment to be a significant financial contributor in 2014.
We'll have a couple of updates as more analysts tell us what they're seeing in the Lennar release, and listen in on the earnings call today at 11 a.m. EST.
Learn more about markets featured in this article: Houston, TX.