The housing market hasn’t looked this good since the bubble, and that has homebuilders like Lennar (LEN) beating estimates and putting up strong gains in an otherwise poor year for stocks.
Indeed, LEN stock rose nearly 3% soon after the opening bell Monday on better-than-expected Lennar earnings. LEN stock is now up about 15% year-to-date. Meanwhile, the S&P 500 is wallowing in the red with a loss of more than 4% so far this year.
The Federal Reserve declined to hike interest rates last week over concerns about a slowdown in the world economy, but it doesn’t have to worry about the U.S. housing market.
As Lennar CEO Stuart Miller said in a statement:
“During the third quarter, the housing market continued to improve in its slow and steady manner, as demonstrated in the past few years. The new home and rental markets continued to have significant pent-up demand, which positions us well for years to come.”
In addition to pent-up demand, LEN is getting a boost from higher selling prices. It’s also significant that although mortgage rates ticked up over the second quarter, financing remains affordable.
Across the wider housing market, U.S. building permits bounced back from a steep July decline to rise 3.5% in August. At the same time, housing starts topped 1 million units for the fifth straight month.
Demographic trends should continue to support such growth for some time. The massive cohort of millennials is entering the housing market, and rental occupancy rates are high.
LEN Clobbers Estimates
Put it all together, and Lennar had a very good quarter with more to come. Orders — a measure of future demand — rose 10% in LEN’s fiscal third quarter, with strength seen across the U.S.
Only the Houston market remained a weak spot, as revenue fell 12% because of the crash in oil prices. That metro area accounts for only 10% of Lennar’s homebuilding revenue, however, so the impact on earnings was minimal.
For the most recent quarter, Lennar earnings beat Wall Street’s forecast by a wide margin. LEN reported a profit of $223 million, or 96 cents a share, up from $177.8 million, or 78 cents a share, in last year’s quarter. Analysts, on average, expected earnings of 80 cents a share, according to a survey by Thomson Reuters.
Revenue grew 24% to $2.49 billion, topping the Street’s forecast of $2.42 billion in sales.
Bottom Line
LEN is the No. 2 homebuilder by volume thanks, in part, to its diversified portfolio of offerings and services. The company caters to both entry-level and move-up buyers in 17 states. It also derives revenue from activities like mortgage financing and mortgage financing.
As such, LEN stock is ideally suited as a play on a resurgent housing market. That’s why it’s beating the SPDR S&P Homebuilders ETF (XHB) by more than 7 percentage points for the year to date.
If you’re bullish on the housing market and want to stock pick in the sector, LEN stock is a lock.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
