(LEN) Lennar’s Second Quarter Beats Estimates

Lennar Corporation (LEN) reported net earnings of $13.8 million or 7 cents per share in the second quarter of fiscal 2011 ended May 31, 2011, compared with $28.7 million or 15 cents per share in the year-ago quarter. Reported earnings were higher than the Zacks Consensus Estimate of 4 cents per share.

Total revenue in the quarter dropped 6.1% year over year to $764.5 million, due to poor performance across all the company’s reporting segments, except Rialto Investments. However, revenues exceeded the Zacks Consensus Estimate of $655 million.


Revenues from the Home building segment declined 6.1% to $662.5 million. This was attributable to a 6.5% drop in home sales to $649.8 million and a 9% decrease in new home deliveries (excluding unconsolidated entities) to 2,652 units, partly offset by a 2% increase in the average sales price of homes to $245,000. Lennar experienced lower deliveries across each of its Home building segments, except the East segment.

New home orders dipped marginally to 3,204 homes from 3,207 homes. Cancellation rate was 17% during the quarter. Backlog decreased 1.2% to 2,470 homes, mainly due to the absence of any incentive like the federal tax credit that expired last year. The segment operating earnings were $21.2 million versus $29.5 million a year ago.

Sales incentives offered to home buyers increased to $33,900 per home (12.1% of home sales revenues) from $31,100 per home (11.5% of home sales revenue) in the year-earlier quarter.

Financial Services

Financial Services segment revenues fell 20.3% to $59.4 million. The segment posted operating earnings of $2.5 million in the quarter compared with $13.7 million in the second quarter of fiscal 2010. The significant decline in profit was primarily attributed to decreased business volume in the segment’s mortgage and title operations.

Rialto Investments

Segment revenues rose 23.1% to $42.6 million (which consisted primarily of interest income associated with the segment’s portfolio of real estate loans) from $34.6 million in the prior-year quarter. Operating earnings were $22.7 million (which included $12.9 million of net earnings attributable to non-controlling interests), compared with $14.7 million (which included $9.6 million of net earnings attributable to non-controlling interests) in the same period last year.

Financial Position

Lennar had cash and cash equivalents of $945.2 million from home building as of May 31, 2011 compared with $1.09 billion as of May 31, 2010. Net debt from home building amounted to $2.16 billion as of the above date, reflecting a net debt-to-capitalization ratio of 44.9%.

Our Take

A depressed housing industry is the biggest concern for any home builder including Lennar. Besides, there is no sign of a speedy recovery. Home sales declined consistently in each of the first three months of the year. The situation is feared to deteriorate further. In addition, house prices also plunged continuously, driven by an excess supply of homes in the face of depressed demand coupled with tough competition from pre-owned homes.

Moreover, regulations in the secondary mortgage market- as well as a decline in demand for mortgage-backed securities, could force Lennar to pay its borrowers from its own reserves. This would lower its cash reserves and increase its exposure to defaulting risk.

Keeping these in mind, the shares of Lennar are maintaining a Zacks #4 Rank, which translates into a short-term Sell rating.

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