Billionaires Are Betting on This Homebuilder

DUQUESNE CAPITALLennar Corporation (NYSE:LEN) had only a $4.5 billion market capitalization at the end of June, but the homebuilder punched far above its weight class in our database of 13F filings. 40 hedge funds and other notable investors reported a position in Lennar, considerably more than at many large-cap companies. This figure was unchanged from the first quarter of the year. One of the funds which had a large position in Lennar at the end of June was billionaire Ken Griffin’s Citadel Investment Group. Citadel more than doubled its stake over the course of the quarter to a total of 4 million shares (see more stock picks from Ken Griffin and Citadel Investment Group). Billionaire Stanley Druckenmiller hadn’t owned any of the stock at the end of March but three months later had purchased 3.3 million shares (see billionaire Druckenmiller’s favorite stocks). Vinik Asset Management- named after its founder and manager, billionaire Jeffrey Vinik, had a small position last quarter but increased it during the second quarter, closing June with a total of 1.5 million shares (track more investment activity from Vinik Asset Management).

In the second quarter of Lennar Corporation’s fiscal year, which ended in May, the company recorded an impressive 22% increase in revenue compared to the same quarter last year. A large income tax benefit skewed earnings numbers, but income before taxes doubled ($52 million versus $26 million) and so we can say that the bottom line benefitted from the increase in business. The first half of the fiscal year now stands at a 12% increase in revenue, though income before taxes is actually down due to high costs in the first quarter.

At its current market cap, Lennar Corporation now trades at a trailing P/E multiple of 14 (though this seems to include earnings from the income tax benefit rather than recurring income). The forward P/E is 26, partly as a result of an 82% rise in the stock price so far this year; the market may be more bullish here than the sell-side. As one might imagine, Lennar’s beta is well above 1 at 1.6, indicating that on a statistical basis it tends to follow the broader market.

Lennar can be compared to a set of other residential construction businesses. We would choose Toll Brothers Inc (NYSE:TOL), D.R. Horton, Inc. (NYSE:DHI), KB Home (NYSE:KBH), and PulteGroup, Inc. (NYSE:PHM) as peers. Like Lennar, all of these companies have seen their stock prices more than double over the last year as the market expects a recovery in housing. All four of these companies have also joined Lennar as showing double-digit growth rates in revenue in their most recent quarter compared to a year ago; however, only Toll Brothers, at a 41% growth rate, trumped Lennar’s results on that front. PulteGroup and KBHome are unprofitable on a trailing basis, and KB Home is not expected to do well next year either with analyst consensus of 6 cents per share. The sell-side thinks that PulteGroup’s recovery will be significantly sharper, with the expected 91 cents per share implying a forward P/E of 18. Toll Brothers and DR Horton are profitable but their forward earnings multiples are at least as high as Lennar’s: DR Horton’s comes in at 25 while Toll Brothers trades at 34 times forward estimates. We’re impressed by Toll Brothers’ recent growth, and it deserves to trade at a higher multiple, but probably not quite as high as it does. DR Horton is so close in terms of recent performance and forward earnings multiples that we don’t see much daylight between the two in the market, and so if we had to suggest one it would probably be Lennar on the basis of the strong hedge fund interest.

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