Cramer has frequently discussed homebuilder Lennar Corporation (NYSE:LEN) over the past couple of months. With interest rates remaining a thorny issue between the Federal Reserve and President Trump, and their impact being painful for the housing sector, most of Cramer’s remarks have focused on the rates as well. For instance, in Mad Money aired on June 5th, Cramer insisted that Lennar Corporation (NYSE:LEN) needed lower interest rates to sell more homes. As the Federal Reserve hiked interest rates on September 16th, Cramer urged everyone to understand the hard impact on Lennar Corporation as a result:
“I’m kind of really, saddened about this. Lennar is one of the great homebuilders of all time. I covered Leonard Miller when I was at Goldman, Lennar. Stuart Miller has done a great job. This is, other than Toll Brothers, this is the best home builder in our country. And look at that. And what happens when we go to seven and a quarter on rates? What I’m seeing here, Barclays, Underweight, cut 79 to 70. I just think that while we raise rates, and I do think rates should rise because of inflation, the problem is that this industry, which is so big, is just going to get further crushed. And I have no solution for that, other than the fact that Lennar down here tells me, wait a second, remember, that there is an industry, that’s being decimated by your rate increases.”
Lennar Corporation’s third quarter earnings, released on September 16th, indicated the ‘decimation’ that Cramer talked about. The firm’s profit sat at $283 million for the quarter, which was half of the year ago figure of $591 million. At the same time, revenue dropped by 8% annually to sit at $8 billion. High mortgage rates were at the heart of the woes as they reduced the demand for Lennar Corporation’s homes.
Consequently, these rates also sit at the heart of the debate for the firm. The weakness in the overall market was reflected by inflation eating into costs as Lennar Corporation’s home sales gross margin dropped to 15.8% from the 17.5% in the year-ago quarter. At the same time, new orders dropped to 20,879 for a 9% annual drop.
Yet, at the same time, Lennar Corporation’s experience and operational strengths came into play. During the quarter, the firm’s core construction costs dropped by 6% to $80 per square foot. Similarly, Lennar Corporation also cut its cycle time down to 116 for a new industry low. Together, these figures indicate that management is running a tight ship as long as the rate environment improves to stimulate the housing market.
As for the hedge funds, 65 funds disclosed a stake in Lennar Corporation in Q2, which marked little change over the Q1 figure, according to Insider Monkey’s data. Yet, hedge fund interest in Toll Brothers dropped to 49 funds in Q2 for a sharp drop over the Q1 figure of 59. Looking at the valuation, Lennar Corporation trades at a forward P/E ratio of 11.30, which is higher than Toll’s 9.8. Unsurprisingly, while the firm has a short interest as a percentage of float of 0.24%, Toll’s percentage is 5.25%.
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