Is Lennar The Best Way to Profit From Homebuilding?

Fiscal cliff? Hard landing in China? Tell that to the American consumer. Alongside generally good confidence and retail sales numbers, housing starts have begun to tick back up and increased 15% between August and September. This corresponds with quarterly reports from large banks, which generally noted positive developments in the housing market. Lennar Corporation (NYSE:LEN), a $7.3 billion market cap homebuilder which also provides mortgage lending and other real estate services, was up about 2% on the day. It is now up about 140% in the last 52 weeks.

DUQUESNE CAPITAL

Lennar’s third fiscal quarter, which ended in August, showed an increase in revenue of 34% compared to the third quarter of 2011. This brought top-line growth through the first three quarters of the fiscal year to 29%, suggesting that activity was accelerating even at that time. As a result of this growth, the company pulled what had been low earnings numbers in 2011 up quite substantially: in the third quarter, for example, net income increased from $21 million a year earlier to $87 million. Business was particularly strong in south Florida and Houston. Lennar Corporation trades at 14 times trailing earnings, but with the sell-side expecting business in its next fiscal year to be significantly cooler its forward P/E is a considerably higher 24. That trailing multiple is very reasonable given the company’s growth, and while we are aware that homebuilding is cyclical and the growth trend won’t be continuing for the next ten years it is still an attractive feature.

A number of hedge funds and other notable investors piled into Lennar Corporation during the second quarter of 2012. Billionaire Stanley Druckenmiller initiated a position of 3.3 million shares, which meant that at the end of June he had $100 million invested in the stock; it was his second largest 13F position by market value (see more stock picks from Stanley Druckenmiller). Ken Heebner’s Capital Growth Management had owned a small position in the stock and increased it over the course of the second quarter to a total of 4.2 million shares (research more stocks that Capital Growth Management bought). Citadel Advisors, managed by billionaire Ken Griffin, more than doubled the size of its own stake in the stock (find other stocks that Ken Griffin liked).

We would compare Lennar to fellow homebuilders D.R. Horton, Inc. (NYSE:DHI), Toll Brothers Inc (NYSE:TOL), PulteGroup, Inc. (NYSE:PHM), and KB Home (NYSE:KBH). The latter two of these companies are unprofitable on a trailing basis, but grew their revenues 15-16% in their most recent quarter versus the same period a year ago and Wall Street analysts expect them to be profitable in their next fiscal year: KB Home barely so, and PulteGroup enough to drive a forward P/E of 19. KB Home is also a significantly smaller company in terms of market cap, with its equity valued at $1.3 billion, so perhaps it is not as good a buy. PulteGroup’s discount relative to Lennar on a forward earnings basis is interesting, but it is based on an expectation that it will improve its business while Lennar declines. We’d need to investigate further to check on that assumption.

D.R. Horton looks a bit similar to Lennar: a low trailing P/E, but with consensus implying that it trades at 24 times forward earnings. Its revenue was 15% higher in its most recent quarterly report compared to the same period in 2011, with a large percentage increase in earnings. In this case there’s little on the surface to make one or the other more attractive. Toll Brothers, which concentrates on higher-end residential developments, is high priced at 32 times forward earnings estimates but has seen very high revenue and earnings growth recently. We think it warrants a slightly higher multiple for its higher-priced focus, but probably not to the degree that we see in the market.

Lennar actually seems to be one of the better picks in the homebuilding industry, with D.R. Horton seeming to be at about the same value and PulteGroup requiring further analysis to make a judgment call. It does look a bit expensive on a forward earnings basis, but given the depth of the housing decline the company may be able to prove fairly valued in the event of a sustained recovery.

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

10 Top Reasons For Getting Fired

The 3 Best States to Start an LLC

10 Jobs That Allow You to Travel

7 High-Paying Jobs You Can Do From Home

12 Best Cities to Shop in USA

10 Best States To Practice Medicine

The 10 Best States to Have a Business

The 12 Most Expensive Apple (AAPL) Apps in the Market

The 10 Richest Billionaires in the World

10 Biggest Kickstarter Failures

The 10 Best Places to Work At

The Top 10 of Google Inc (GOOGL)’s Most Expensive Acquisitions

13 Best Cities to Visit in South America

10 Most Expensive Works of Art of All Time

The 10 Richest Banks in the World

The 10 Best-Paying Jobs in America (2014)

7 Most Expensive Foods in the World

The World’s Top 10 Earning Authors

Five Wicked and Very Expensive Items (and Other “Stuff”) Sold on eBay

10 Biggest Celebrity Bankruptcies

The Top 10 Highest Paid CEOs in 2014

The 10 Most Expensive Real Estate Cities in America

10 Most Expensive States To Live In America

The 10 Best Airlines in the World

The 10 Best-Selling Cars in 2014

The 10 Best Industries to Invest In

The 10 Most Expensive States to Own a Car In

Top 10 Business Schools in US: 2014 Rankings

Top 20 Female Billionaires in 2014

6 Movies That You Should Watch to Better Understand The Cold War

Top 15 Best Paying Jobs for Women in 2014

Top 6 Things Rich People Do Differently Every Day

5 Retirement Mistakes To Avoid (and Einstein’s Famous Quote)

11 Smartest People in the World

6 Films About the Financial World You Need To Watch (While “The Wolf” is Not Around)

Warren Buffett and Billionaires Are Crazy About These 7 Stocks

The Top 10 States With Fastest Internet Speeds

10 Best Places to Visit in USA in August

Top 10 Cities to Visit Before You Die

Top 10 Genetically Modified Food In the US

15 Highest Grossing Movies Opening Weekend

5 Best Poker Books For Beginners

10 Strategies Hedge Funds Use to Make Huge Returns

Top 10 Fast Food Franchises to Buy

10 Best Places to Visit in Canada

Best Summer Jobs for Teachers

10 Youngest Hedge Fund Billionaires

Top 10 One Hit Wonders of the 90s

Fastest Growing Cities In America

Top 10 U.S. Cities for Freelancers

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!