Bearish Stock to Watch: Lennar Corporation (NYSE: LEN)

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Lennar Corporation (NYSE: LEN) stock lost over 3.4% in the pre-market session of September 15th, 2020 pre-market session (Source: Google finance) post lower than expected results for the third quarter of FY 20. For the third quarter, new orders and starts rose up 16% and 17%, respectively, over last year. The new home deliveries, limited by the production pause in the second quarter due to pandemic, increased only 2% over last year, but the gross margin expanded to 23.1%, which is a 270 basis point increase over the prior year, and the net margin reached an all-time, third quarter high of 15.1%.

The company reported third quarter net earnings attributable to Lennar in 2020 of $666.4 million, compared to third quarter net earnings attributable to Lennar in 2019 of $513.4 million. The company’s result benefited from solid market conditions combined with the strong execution of the home building and financial services businesses. The fundamentals in the housing market remained strong on the back of record low interest rates and a continued under supply of new and existing inventory. The housing market continued its strong rebound from the significantly weaker sales environment earlier in the year as a result of COVID-19.

LEN in the third quarter of FY 20 has reported the adjusted earnings per share of $2.12, while the adjusted revenue of $5.87 billion in the second quarter of FY 20. The revenues from home sales rose 3% in the third quarter of 2020 to $5.5 billion from $5.3 billion in the third quarter of 2019. The revenues were higher mainly due to a 2% rise in the number of home deliveries, excluding unconsolidated entities, and a 1% rise in the average sales price of homes delivered.

Additionally, the company had paid off approximately $400 million of debt during the third quarter, had no borrowings under the $2.4 billion revolving credit facility and ended the quarter with $2.0 billion in cash and home-building debt to capital ratio of 29.5%, reflecting an all-time low.

The company expects the fourth quarter closings to be in the range of 15,500 – 16,000 homes with gross margins expected to be in the range of 23.25% – 23.5% range. Due to strong demand and limited new and existing home inventory, the company expects home sales to remain strong for the foreseeable future. LEN project fourth quarter sales to be between 13,800 and 14,300 homes.

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