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Lennar Earnings Indicate No Recovery In Sight

Posted: Sep 23, 2008 14:51 PM by Eric Fox

Tickers in this Article: LEN, AIG, LEHMQ, FRE, FNM, XHB

Lennar Corp (NYSE:LEN) reported fiscal third-quarter earnings below analyst consensus estimates, belying any notion of a nascent recovery as the homebuilding industry continues to show no bottom on fundamentals.

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Lennar reported a loss of $89 million, or 56 cents per share, and revenue of $1.11 billion vs. analyst expectations of a 55-cents-per-share loss on $1.3 billion of revenue in the third quarter ended August 31.

False Hope?
Although some investors touted the smaller loss compared to the same quarter in 2007, when Lennar lost $513.9 million, or $3.25 per share, the company quickly put that to rest. Stuart Miller, president and chief executive officer of Lennar Corporation, said: “While we expected the housing market to remain constrained throughout the third quarter, the weakness in the market actually accelerated as a result of increased foreclosures, weakened consumer confidence and tightened mortgage lending standards…”

Lennar took $132 million, or 53 cents per share, in write-offs and valuation adjustments in the quarter. These included 144 SFAS valuation adjustments totaling $48.6 million, plus $10.8 million in write-offs of option deposits, $39.9 million in valuation adjustments to investments in unconsolidated entities, $5.5 million in write-offs of notes receivable and $27.1 million in goodwill impairment in the financial services segment.

Lennar ended the quarter with cash of $857.1 million and net debt to total capital of 30.2%. Gross margin, excluding the $132 million in write-offs and valuation adjustments, was 18% for the quarter. New orders of homes were down 42% year over year and the cancellation rate was 27%.

While the company was able to cut Selling, General and Administrative (SG&A) expenses by 49%, or $148 million from last year, SG&A, as a percentage of home-sale revenues, increased to 15.7% from 14% because revenues fell even more.

Management even made a plea to the federal government to help the industry, joining the long line of those who want to be included in any bailout by stating: "Although the federal government has recognized that stabilizing the housing market is critical to solving the current credit crisis, the government has yet to act meaningfully to help stabilize home prices. While we were encouraged that Congress passed the July housing stimulus bill as a first step, additional government actions will be necessary to help facilitate housing market stabilization, which in turn will help stabilize the financial markets as well."

Weak Macro Data
Macro fundamentals have still not improved. The U.S. Census Bureau reported August 26 that sales of new residential homes fell in July to a seasonally adjusted annual rate of 515,000, down 35.3% from July 2007. The government also estimated that new homes for sale at the end of July totaled 416,000, which represented a supply of 10.1 months at the current sales rate. The next release of new home sales is due out September 25. (For more on how macroeconomic policy and measures affect everyone, check out Macroeconomic Analysis.)

The homebuilders have held up fairly well during the last month, which saw the U.S. government placing the Federal National Mortgage Association (Fannie Mae) (NYSE:FNM) and the Federal Home Loan Mortgage Corp (Freddie Mac) (NYSE:FRE) into conservatorship, the near failure of American International Group (NYSE:AIG) and the bankruptcy filing of Lehman Brothers (Nasdaq:LEHMQ).

The SPDR S&P Homebuilders ETF (AMEX:XHB) is trading at $20.34, up 50% from its 52-week low of $13.81, and the last month has seen the index move up 10% in value.

Investors have been optimistic that homebuilders have bottomed out, but the Lennar earnings report and macro data from the government give little confirming evidence of any rebound.

For more, read Economic Indicators: Housing Starts.

By Eric Fox

Eric J. Fox, is the founder of Brittain Capital Management, LLC., which manages the Alesia Fund, LP., a Value oriented long/short investment partnership. You can read more of his views on investments at his blog - Stock Market Prognosticator.

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