Lennar Expects Earnings to Benefit From Rebound in Housing

NEW YORK (TheStreet) -- Lennar Corp. (LEN), one of the largest homebuilders in the U.S., will report second-quarter earnings results Wednesday before the opening bell. With its shares up more than 10% on the year to date, the Miami company has benefit from a slight rebound in the housing market, posting 236% stock gains in the past five years.

At $49.48, its share are up 10.4% for the year to date compared with a 9% gain for the period in the SPDR S&P Homebuilder ETF (XHB) at a time of concern growth expectations the entire sector has gotten too bullish.

Is it time to lock in profits in homebuilders? In Lennar's case, no.

Lennar, which has beaten the average analyst earnings estimate for 13 straight quarters, continues to execute on its business. The company consistently grows profits, driven by its focus on selling higher-priced homes that generate higher margins.

In the first quarter, for instance, the company posted a 19% year-over-year increase in home deliveries. The average sales price of homes delivered climbed more than 3% year over year to $326,000 from $316,000 in the first quarter of 2014. This led to earnings per share surging 43% year over year to 50 cents per share from 35 cents last year.

With Lennar posting a first-quarter backlog of 6,817 homes, up 20% year over year -- worth some $2.4 billion -- this implies strong pent-up demand. Equally important, the backlog marks a 24% year-over-year increase in home sales volume, a strong indicator of the type of numbers Lennar is likely to report for its second quarter.

All this bodes well for the stock, especially when combined with clearer signs that residential home construction, according to the U.S. Census Bureau, is starting to pick up. So investors would be wise to invite LEN shares into their portfolios before ahead of Wednesday's results.

For the quarter ended in May, the average analyst estimate calls for a 6.5% jump in earnings per share, reaching 65 cents, while second-quarter revenue of $2.03 billion would mark a 11% year-over-year increase. For the full year, ending in November, revenue is projected to grow 17% to $9.12 billion, while full-year earnings is expected to be $3.16 per share, up 13%.

All told, Lennar's riding a hot hand, buoyed by its operational focus, which led to a 28% year-over-year increase in first-quarter operating income. And LEN stock is cheap, trading at just 16 times earnings, against a price to earnings ratio of 21 for the average stock in the S&P 500 (SPX) index.

It would be a foolish move to part with this winner, especially at a time home volume and prices are on the rebound. Given the rate at which operating margins have climbed due to higher-priced homes, Lennar stock should reach $60 in the next 12 to 18 months, delivering some 30% gains.

This article is commentary by an independent contributor. At the time of publication, the author held no shares in any of the stocks mentioned.

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