Housing is one cold spot in the economy that continues to baffle and rattle investors. And with good reason. Homebuilders, for instance, have had a long, steep slide to the cellar as housing demand and prices remain dormant. Will housing stocks ever command a buy again? Wall Street is far from enthusiastic about the group, but it has come up with encomiums for a handful of homebuilders.
Topping the list is Lennar (LEN), one of the largest geographically diversified homebuilders in the U.S. that specializes in moderately priced houses. And some large institutional investors have dared to invest even as many others have been too scared to venture into anything that has to do with housing. Fidelity Management, JPMorganChase and Vanguard Group, to name a few, have accumulated shares of Lennar, which participates in every phase of planning and building a house -- but it subcontracts nearly all of the development and construction work.
Lennar is one of the few housing stocks that has attracted Wall Street's favor. Of the 22 analysts who follow it, 13 recommend buying the stock, nine rate it a hold and none suggests dumping the shares. Two other homebuilders whose shares have shown relative strength are Big Board-listed Toll Brothers (TOL) and D.R. Horton (DHI).
An Opportunistic Buyer
Notwithstanding the high unemployment levels, increased foreclosures and tightening credit standards, "Lennar will benefit from its diversified markets for new homes and from its other real estate-related investments," says Kenneth M. Leon, analyst at Standard & Poor's, who rates the stock a strong buy. Lennar was S&P's Focus Stock of the Week last week. Now trading at $14 a share (down from $21 in late April), Lennar should hit $21 over the next 12 months, predicts Leon. Five years ago, the stock traded as high as $66.
One factor in Lennar's favor: It has a cash stash of more than $1.2 billion, which has allowed the company to be opportunistic in buying the flood of land and home properties that many beleaguered banks had been forced to seize because of foreclosures and have been selling at heavily discounted prices..
Leon expects Lennar will return to profitability in 2010, and he figures it will earn 50 cents a share this fiscal year ending Nov. 30, and $1 in fiscal 2011. Lennar lost $2.45 a share in fiscal 2009. He expects revenues to edge up 3% this year, after a huge drop of 34% last year, to $3.1 billion.
The U.S. housing market is slowly stabilizing because homebuyers can now take advantage of declining prices, a large supply of inventory and historically low interest rates for home mortgages. So "we view Lennar as a compellng investment opportunity," says Leon.
Favorable Growth Volume
Land markets have seen lots of activity, and certain parts of the country are faring well in that regard, including Tampa; Washington, D.C.; Raleigh, N.C.; San Francisco; and Orange County, Calif., according to Jonathan Ellis, analyst at Bank of America Merrill Lynch Still, bidders are scarce for land deals, he notes.
"Lennar remains our top long [buy] idea among homebuilders, given its leverage to a volume-driven recovery," says Ellis in a recent report, Typically, Lennar is able to sell 25% of its communities annually, says Ellis, who expects that percentage to increase. He says his buy rating assumes favorable volume growth in fiscal 2010 from the company's exposure to the "first-time [buyers] market and first move-up and active adult buyers."
The anticipated improved economic conditions in the second half of the year as well as Lennar's investments in depressed markets should boost margins, figures Ellis. He also expects Lennar's bottom line to turn around this fiscal year with estimated earnings of 27 cents a share on total revenues of $2.91 billion this fiscal year, 95 cents on $3.38 billion in fiscal 2011, and $1.49 on $3.79 billion in fiscal 2012.
Most market players are still unconvinced that housing will pull out of its long slumber anytime soon, but evidence is mounting -- if ever so slowly -- that Lennar is building up its prospects to regain investor confidence.
Understanding Stock Market Indexes
What does it mean when people say "the market is up 2%"?View Course »