Homebuilder Lennar (NYSE:LEN) reported 3rd quarter results after the bell on Tuesday and gave investors everything they asked for and more. Almost. The only thing wrong with the report is an expectation for lower average selling prices in the coming quarter. That could be a problem but then again it may be a red herring.
Average selling prices have as much to do with the mix as anything else. A smaller or less well-finished house may bring in slightly less revenue, but they are cheaper and quicker to build. With business accelerating and margins improving the company is on track for sequential and YoY growth regardless of the outcome. And Lennar could surprise us. The guidance could be overly conservative and there is reason to believe that is the case.
What this leaves us with is a conundrum. The report is good and yet shares are falling. This could be a sign of some underlying weakness I’ve not uncovered but I don’t think so. What we have here is another entry point into a post-pandemic winner.
Lennar Post Solid Quarter, Guides The Market Higher
As I said, there is really nothing not to like about Lennar’s Q3 report. Revenue grew, earnings grew, margins expanded, new orders rose, backlogs got bigger, deliveries topped guidance, and it all beat the consensus. Starting at the top-line, revenue came in at $5.87 billion. This is up 0.2% from the previous year despite COVID-related production slowdowns in the first half of the year. The analysts had been expecting revenue to fall as much as 5.0%.
On the bottom line, GAAP EPS came in at $2.12 to top consensus by $0.56. This is an increase of 33% over the last year and driven by a substantial improvement in margins. Margins grew about 3.0% at both the gross and operating levels putting 3rd quarter operating margin at an all-time record. The average sales price for the quarter is $396,000, up $2000 from the last year.
Looking forward, there are two indications business will remain strong for the foreseeable future. The first is the backlog. The backlog of unbuilt homes grew 4.0% to top consensus. The backlog is nearly 20,000 homes compared to the 13,842 that were completed during the quarter. The second is the number of new orders. The number of new orders grew 16% on a count-basis and 20% on a dollar-value basis and demand has only been growing.
The Guidance Is Strong, And So Is The Data
Lennar’s guidance of declining average sales prices should be taken with a grain of salt. None of the data suggests there is going to be any let-up in demand for homes and that will underpin prices across the board. The remainder of the guidance is favorable. The company is expecting to see deliveries top 15,000 and New Orders 14,000, a perfect balance to keep the backlog at a business-sustaining level.
The August NAHB Home Builders Index is a great example. The index jumped 6 points to an all-time high of 78. The reading is underpinned by strength in all three sub-indices. Sales of single-family homes jumped 6 points to 84, the outlook for sales jumped 3 points to 78, and the traffic of prospective buyers gained 8 points to hit 65.
The Technical Outlook: Lennar Slips But Bargain Hunters Were Ready
Shares of Lennar slipped following the earnings release but did not fall far. Bargain hunters were waiting to step in at the $75 level confirming support at the short-term moving average. The stock may continue to move sideways in the near-term but the longer-term outlook is bullish. There is some resistance at the $80 level to be wary of but it may fall over the next few days. The September reads on Homebuilder Sentiment, Housing Starts, and Building Permits are all due out this week. If they come in hot I expect to see the entire home building and home-improvement complex to move higher.
