Value Questions Circle Lennar

Management teams are given a lot of discretion in determining whether land and other housing inventories are required to be impaired each quarter. In theory, auditors are eyeing the builders' assumptions, but the impairment models remain a black box for investors.

Assume that all of Lennar's land is worth just 40 cents on the dollar, the price Morgan Stanley is paying for this deal.

Lennar reported $6.72 billion of inventories on its books at the end of August. With a 60% haircut, the inventories have a fair market value of $2.69 billion.

Other non-inventory assets on the company's balance sheet total $3.71 billion. This number includes cash and receivables -- which are probably stated correctly. The figure also includes $173 million of goodwill and a $1 billion investment in various joint ventures. (To be gentle, we'll assume these numbers are also stated correctly.)

Applying the 60% discount, Lennar's total assets are now worth $6.4 billion. Total liabilities equal $5.3 billion.

Book value -- the part left for shareholders -- is now $1.08 billion, or $6.80 per share.

Lennar's stock recently was trading at $16.05, up 21 cents, or 1.3%.

If all of Lennar's land is really worth 60% less than stated on its books, then the stock is trading at 2.3 times book value. Builders during the downturn have been trading at discounts to book value.

Thus the deal by Lennar once again raises the worry of catching a falling knife in the sector.