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Lennar's 1Q14 earnings: Revenue increases 38% from 2013

Part 2
Lennar's 1Q14 earnings: Revenue increases 38% from 2013 (Part 2 of 4)

Why Lennar continues to experience strong revenue growth

The top line is growing rapidly for Lennar

For the first quarter, Lennar reported $1.36 billion in revenues, an increase of 38% year-over-year. Homebuilding revenues increased 33%, to $1.1 billion from $855 million in the first quarter of 2013. Sales incentives dropped to $21,300 per home from $23,300 last year, which is a drop from 8% of the average home to 6%. Like most builders, Lennar is benefiting from tight inventory, which allows it to raise prices. This explains some of the record margins that it has been reporting. Rialto Investments reported $47 million in revenues, which consisted primarily of securitization revenue and interest income from new loan origination.

Lennar RevenuesEnlarge Graph

Pay attention to both units and dollar values

For the quarter, average selling prices increased 17.5% to $316,000 from $269,000 during the same period last year. We’ve seen increases in average selling prices from every homebuilder. Deliveries were 3,597 homes, a 13% increase from the first quarter last year. This is an improvement over some of the other builders like KB Home (KBH), which actually experienced a drop in deliveries on a unit basis.

New orders increased 10% in units, to 4,465 homes, and the dollar value of new orders increased 25%, to $1.5 billion. Backlog is 5,562 homes, or $1.9 billion. This is an increase of 15% in units and 33% in dollar terms. Backlog is one of the best ways to forecast revenues going forward.

Lack of inventory remains an issue, but for how long?

The big question for the builders is whether they can continue to raise prices as aggressively. Buyers are being subjected to a double whammy between higher mortgage rates and higher prices. The big increase we’ve seen in average sales prices are probably not sustainable.

Another big question for the builders is when the first-time homebuyer will return. Household formation was exceptionally low during the housing bust due to the tight job market. Housing starts are still highly depressed compared to historical levels. We recently broke 1 million starts, which has only happened twice since the collapse. Historically, a million units is a severely depressed level—we’ve averaged around 1.5 million units per year since the 1950s. At some point, the builders will be unable to increase the top line simply by raising prices and will have to increase deliveries. This will help bring supply and demand back into balance. This will be a positive not only for Lennar, but also builders like PulteGroup (PHM), D.R. Horton (DHI), and Toll Brothers (TOL).

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