Lennar Earnings Beat Estimates as Housing Sales Surge

Lennar Corp. (LEN), the third-largest U.S. homebuilder by revenue, reported fiscal second-quarter earnings that beat analysts’ estimates as sales and prices jumped in a recovering U.S. real estate market.

Net income was $137.4 million, or 61 cents a share, in the three months through May, compared with $452.7 million, or $2.06, a year earlier, when Lennar booked $403 million in deferred tax assets, the Miami-based company said in a statement today. Excluding a tax-related gain in the recent quarter, profit was 43 cents a share, more than analysts’ median forecast of 33 cents, based on 20 estimates compiled by Bloomberg.

Lennar and other builders have benefited from revived demand for new houses amid tight inventories of existing homes on the market and a move by buyers to lock in low interest rates before an expected increase. U.S. new-home sales climbed 29 percent from a year earlier in May to an annual pace of 476,000, the highest since July 2008 and exceeding all estimates in a Bloomberg survey, the Commerce Department reported today. While some shareholders are spooked by rising borrowing costs, higher rates are a sign that the economy is becoming healthier, which will boost housing demand, Lennar Chief Executive Officer Stuart Miller said on a conference call today.

“Interest rates are moving higher in the context of economic improvement,” he said. “We’re looking at a supply shortage, so that means that even in the context of rising rates and a better economy, we’re likely to see price increases and rental increases.”

Share Gain

Lennar rose 0.7 percent to $35.23 at the close in New York. The 11-member Standard & Poor’s Supercomposite Homebuilding Index advanced 1.1 percent.

Homebuilder shares had been falling since May amid concerns that the U.S. housing recovery will stall as interest rates rise in anticipation of Federal Reserve plans to taper off purchases of mortgage-backed securities. Lennar tumbled 20 percent from a May 14 high through yesterday.

Lennar’s second-quarter revenue rose to $1.43 billion from $930.2 million a year earlier. The company delivered 4,464 houses, compared with 3,222. The average sales price of homes sold increased to $283,000 from $250,000 a year earlier. Orders climbed 27 percent to 5,705 homes.

Gross margin as a percentage of home sales improved to 24.1 percent from 22.5 percent a year earlier.

‘Strong’ Margin

Lennar “delivered a strong gross margin, reaching levels not seen since 2006,” Adam Rudiger, an analyst with Wells Fargo & Co. in Boston, wrote in a note today. Rudiger, who rates Lennar market perform, or hold, expected earnings of 28 cents a share.

While higher borrowing costs are unlikely to derail the housing recovery, it is “too early to dismiss the risks of rising mortgage rates” based on Lennar’s results, Rudiger said.

Lennar has diversified under Miller into a land and apartment developer and an investor in distressed real estate. That can add to “future growth potential, but it is difficult to get a read what the potential will be –- and in our experience additional complexity in a story can deter some investors,” Eli Hackel, a Goldman Sachs Group Inc. analyst who also has a neutral rating on Lennar, the equivalent of a hold, wrote in a note.

“We remain upbeat on the company’s continued diversification of revenue, which we believe will truly differentiate the company from competitors over time,” Stephen Kim, a Barclays Plc analyst, wrote in a note to investors yesterday. Kim, who has an overweight rating on Lennar, the equivalent of a buy, expected earnings of 40 cents a share.

To contact the reporter on this story: John Gittelsohn in Los Angeles at johngitt@bloomberg.net

To contact the editor responsible for this story: Kara Wetzel at kwetzel@bloomberg.net

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