Tags: Lennar | Homebuilder | Stock Price | Home Construction

David N. Frazier: Lennar's Stock Has Built Solid Foundation for Future Gains

By    |   Thursday, 05 Jun 2014 01:13 PM

After trading in a volatile sideways range between $31 and $45 over the past two years, my research indicates that Lennar Corp. (LEN), one of the larger homebuilders in the United States, is on the verge of breaking above that trading range within the next couple of months. That same research suggests that LEN will rise sharply over the next few years.

builds single-family attached and detached homes in nearly 20 states under brand names including Lennar, Camelot, NuHome, and Greystone. The Miami company targets first-time, move-up, and active adult buyers, and it markets its homes as "everything included."

Lennar is involved in all phases of planning and building its residential communities, including land acquisition, site planning, preparation and improvement of land and design, construction and marketing of homes.

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The company also provides financial services to homebuyers, including mortgage financing, title services, and closing services. In addition, the company purchases, develops and sells residential land.

Through its Lennar Financial Services subsidiary, Universal American Mortgage Company, LLC, Lennar originates conforming conventional, FHA-insured and VA-guaranteed residential mortgage loans to its homebuyers.

During 2013, the company’s financial services subsidiary provided loans to 77 percent of Lennar’s homebuyers who obtained mortgage financing in areas where the company offered those services.

Specifically, the company originated 22,300 residential mortgage loans totaling $5.3 billion during 2013, as compared to 19,700 residential mortgage loans totaling $4.4 billion during 2012.

Lennar sells all of the residential mortgage loans that it originates within a short period in the secondary mortgage market on a servicing released, non-recourse basis.

Through the company’s Rialto Investments division, Lennar raises, invests and manages third-party capital, originates and securitizes commercial mortgage loans, and invests its own money in real estate related mortgage loans, properties and related securities. That division also operates two distressed real estate funds and a mezzanine commercial fund.

For the company’s fiscal year ended Nov. 30, 2013, Lennar sold 18,290 homes, a 33.5 percent increase compared to fiscal 2012 and a 68.6 percent increase compared to fiscal year 2011.

The average sales price of a Lennar home was $290,000 during 2013, compared to $255,000 during 2012 and $244,000 during 2011. As of Nov. 30, 2013, the company owned 125,643 home-sites and had access through option contracts to an additional 28,133 home-sites.

During 2012, Lennar became actively involved in the development of multifamily rental properties by acquiring land and beginning the construction phase of several multifamily rental properties.

Although the company uses third-party management companies currently to rent its apartments, in the future Lennar anticipates renting those properties through one of its entities. As of Nov. 30, 2013, the company had a pipeline of planned multifamily projects totaling $3.7 billion in assets across several U.S. states.

In an effort to differentiate its homes from other homebuilders, Lennar provides homebuyers with features that are not offered by most homebuilders.

For example, the company’s Everything’s Included® marketing program simplifies the home-buying experience by including many of the features that new-home buyers desire as standard items. That marketing program enables Lennar to differentiate its homes from those offered by the company’s competitors, while reducing its construction and overhead expenses through a standardized manufacturing process.

As another example of ways in which Lennar strives to differentiate its homes, the company’s NextGen homes, which are a home within a home, provide a unique home offering for multi-generational households who need to accommodate children and parents to share the cost of their mortgage and other living expenses.

After struggling through the 2007-2010 collapse in the U.S. housing market, Lennar increased its revenues and operating earnings at a very fast pace during each of the past two years.

Specifically, the company increased its income from continuing operations by 127 percent for the year ended Nov. 30, 2012, as compared to the prior year, on a 32.6 percent increase in the company’s revenues; and it increased its earnings from continuing operations by 207 percent during 2013 on a 44.6 percent increase in the company’s revenues.

Looking forward, I expect Lennar to continue to grow its revenues and earnings at a fast pace over the next few years, with the recent readings on numerous housing statistics and leading economic indicators suggesting that the U.S. housing market will improve considerably over the next 12-36 months. Specifically, I expect Lennar to increase its net income by a rate of around 25 percent during each of the next three years.

The number of contracts signed by prospective homebuyers to purchase a home from Lennar seems to support my forecast, with the dollar value of those signed contracts rising by 39.6 percent as of Nov. 30, 2013, as compared to Nov. 30, 2012. In regard to that backlog of orders, Lennar said on Jan. 28, 2014, “We expect that substantially all homes currently in backlog will be delivered in fiscal year 2014.”

The company added, “We are seeing traffic patterns in our communities that indicate that buyers are coming to the market and finding short supplies and we are anticipating a strong spring selling season for fiscal 2014.”

Yet, financial market participants appear to be undervaluing Lennar’s common stock substantially, with my estimates for the company’s earnings over the next three years indicating that LEN closed today at a P/E to earnings growth (“PEG”) ratio of only 0.7.

Therefore, I would advise investors and long-term speculators to by LEN at prices up to $43. LEN closed at $40.99, up 43 cents, or 1.06 percent, in NYSE trading.

Editor's Note: 250% Gains Bagged Using Secret Calendar (See Video)

David N. Frazier has an extensive background in the investment securities industry and has invested in the financial markets for more than 25 years.

In addition to working as a business analyst, merchant banking analyst and equity research analyst, he’s held positions in sales and marketing at institutional investment firms, including William O’Neil & Co., TDAmeritrade, and Merrill Lynch.

David now serves as the President and Chief Market Strategist of Frazier & Mayer Research, LLC (dba www.TheMarketMonk.com), an independent investment research firm that provides research and analytical services to hedge funds, investment advisory firms, and other investment newsletters.

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After trading in a volatile sideways range between $31 and $45 over the past two years, my research indicates that Lennar Corp. (LEN), one of the larger homebuilders in the United States, is on the verge of breaking above that trading range within the next couple of months.
Lennar, Homebuilder, Stock Price, Home Construction
Thursday, 05 Jun 2014 01:13 PM
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