What Lennar's Strong Results Say About Housing Today

No-moat-rated

While management slightly lowered its fourth-quarter 2018 guidance for home deliveries and orders because of "Hurricane Florence…and a bit of sluggishness in today's markets," Lennar's strong third-quarter results and fiscal 2019 guidance are hardly reflective of a housing recovery that has run its course. Indeed, pro forma new order volume increased 11% year over year, and management expects to deliver 53,000 homes in fiscal 2019, a 15% increase over 2018 home delivery guidance.

Lennar has been executing upon its "soft pivot" land strategy, which calls for moderate growth and a lighter land acquisition program, for several years now. However, Lennar appears positioned to double down on this strategy. Approximately 22% of Lennar's lot position is controlled through options or joint ventures. Management expects to increase this metric to 40% in a few years. We had not been modeling as aggressive of a shift to optioned land, which tends to generate lower gross profit margins but higher returns on invested capital, so this disclosure has a valuation impact. We lowered our 10-year average gross margin assumption to 22.6% (from 24% previously), and we now expect average inventory as a percentage of home sales to improve to about 70% over our 10-year forecast (versus 80% previously). As a result of these changes, our fair value estimate declined about 1.5% to $68 per share.

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