Some Encouraging Data Points From LEN

For Rothbort's preview heading into the Lennar conference call, please click here.

There were signs of encouragement from Lennar (LEN - commentary - Cramer's Take) but no conclusive signs of a bottom. On the positive side of the ledger were improvements in margins, some positive trends in the market and reduced inventories. On the flip side are continued foreclosures and impairments though those trends seem to be slowing down.

In addition, the title business remains a drag and is too levered to new home sales. I think that the company should consider selling both the mortgage and title businesses to concentrate on homebuilding. Lennar is not my first choice for a rebound in new home sales; that honor still belongs to Toll Brothers (TOL - commentary - Cramer's Take), which I believe is better managed and has a better balance sheet.

Lennar reported a third-quarter 2008 loss of 56 cents per share on revenue of $1.1 billion. Included in the loss was 53 cents per share on an after-tax basis for impairments, adjustments and write-offs.

Margin improvement was strong, with gross margins rising 400 basis points year over year, to 18.0%, and operating margins increasing 230 basis points, to 2.3% on a year-over-year basis. On a sequential basis, operating margins improved from 0.5% in second quarter 2008. SG&A was reduced by 49%, or $148 million, year over year and stood at 15.7% of revenue.

While revenue was categorized as disappointing, management did express that the company is seeing "a quarterly progression of positive trends in the distressed market environment." That being said, there are no signs of stabilization in the market as foreclosures keep pressure on prices and appraisals, and demand remains inconsistent. On a positive note, however, inventories of completed homes are very low.

Joint ventures are also being reduced. The number of joint ventures stood at 146 vs. a peak high of 270 and 163 at the end of second quarter 2008. Sixty-seven of the joint ventures have no debt, 31 have nonrecourse debt, and 48 have recourse debt. Lennar does not support the debt of nonrecourse obligations and will not excuse partners from sharing in losses. Total land inventory is down 50% year over year.

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At the time of publication, Rothbort had no positions in the stocks mentioned, although positions can change at any time.

Scott Rothbort has over 20 years of experience in the financial services industry. In 2002, Rothbort founded LakeView Asset Management, LLC, a registered investment advisor based in Millburn, N.J., which offers customized individually managed separate accounts, including proprietary long/short strategies to its high net worth clientele. He also is the founder and manager of the social networking educational Web site TheFinanceProfessor.com.

Immediately prior to that, Rothbort worked at Merrill Lynch for 10 years, where he was instrumental in building the global equity derivative business and managed the global equity swap business from its inception. Rothbort previously held international assignments in Tokyo, Hong Kong and London while working for Morgan Stanley and County NatWest Securities.

Rothbort holds an MBA in finance and international business from the Stern School of Business of New York University and a BS in economics and accounting from the Wharton School of Business of the University of Pennsylvania. He is a Term Professor of Finance and the Chief Market Strategist for the Stillman School of Business of Seton Hall University.

For more information about Scott Rothbort and LakeView Asset Management, LLC, visit the company's Web site at www.lakeviewasset.com. Scott appreciates your feedback; click here to send him an email.