) --One of the few homebuilding analysts not surprised that
turned in a fourth-quarter profit and showed order growth was James Wilson, of JMP Securities. Wilson had predicted order growth for the quarter and thought that the level of negativity surrounding Lennar was unjustified.
However, when Wilson arrived to work early on Thursday morning and digested the details of the Lennar earnings surprise, he expected the market would react modestly, and Lennar shares wouldn't move much. Instead, Lennar shares have surged 14% on Thursday on five times its average daily volume of trading, and the earning surprise has buoyed the entire homebuilding sector.
"My interpretation of these results would not have been a double-digit stock spike for Lennar," Wilson said, adding, "without the tax benefit, it was another quarterly loss."
Indeed, Lennar was able to engineer a profit in the fourth quarter of 19 cents due to a one-time tax gain of $1.34 -- which it also offset with some huge losses to bring the net tax gain of 45 cents. The First Call consensus had been a 48-cent loss per share for Lennar. "I would hate to think the stock has moved this much just because they printed a gain of 19 cents, because so much of it is the tax gain," Wilson said.
Maybe the most interesting, and puzzling, market response to the Lennar earnings would be if investors were driving the stock higher in response to the fact that Lennar used the one-time tax gain as a way to load up on tax losses in the fourth quarter. Wilson explained that when a company can use tax losses to offset gains that will ultimately help to make future quarters look better also. It's a tactic typical in the banking sector.
"The banks have been doing this for years," Wilson said. However, the skepticism that the banks usually face when they dump losses en masse into a quarter to offset gains isn't skepticism that Lennar faced on Thursday.
Lennar had a total valuation adjustment of $255 million in the fourth quarter. Wilson was skeptical about the kitchen-sinking of losses by Lennar. For one, Lennar is one of the most complicated homebuilders from a financial perspective, with a large percentage of assets held in off balance sheet joint ventures.
"I expected there would be loads of market noise on the impairment charges and year-end kitchen-sinking of losses, as well as about the $255 million number specifically; I just didn't think the market noise would be a reaction so decidedly positive," Wilson said. "I would have thought that the $255 million in losses would be seen by the market as troubling."
There are many positives from the Lennar earnings, to be sure. The kitchen-sinking of losses sets the homebuilder up for much better quarters going forward. The big risk, however, is that there is more to come in terms of the huge losses from Lennar's off balance sheet assets.
"We are at the point where the on-balance-sheet impairments should be nearing zero, but the big negative in the Lennar earnings would be if the loading up on losses reflects that they have holdings that are in worse shape than we thought previously with the off-balance-sheet assets."
Likewise, the housing market still isn't pretty, but the Lennar Bounce seems to be suggesting that investor worst fears about the foreclosure levels and long road to recovery for homebuilders may have been too bearish. Wilson noted that a big part of the Lennar story is tied to the rebound in California at the low-end of the market specifically.
California, having been among the first markets hit hardest in the housing bubble, is further along in its foreclosure pipeline, at the low-end of the housing market, than many other states.
Investors were whip-sawed by
when its recent earnings disappointed. However, the Toll negative surprise was tied to the continuing foreclosure problems at the high end of the real estate market, Wilson noted -- so that, at least, should not be an issue with Lennar, given its focus on the low end of the market.
Wilson was not surprised that the First Call consensus of a 48-cent loss per share was way off in the case of Lennar, due to the complicated nature of the Lennar financials and the myriad of ways to look at the numbers. "Everyone on the buy side tells me that when it comes to Lennar, First Call is a joke," Wilson said.
Wilson wasn't joking about Lennar's 14% spike on Thursday, though. "I like what I see, but I was expecting the best-case scenario to be a flat day for Lennar shares, and more likely down."
-- Reported by Eric Rosenbaum in New York.
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