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

Part 3
Lennar's 1Q14 earnings: Revenue increases 38% from 2013 (Part 3 of 4)

Why Lennar’s gross margins continue to expand in 1Q14

Another in a long string of year-over-year increases in gross margins

For the first quarter, gross margins increased 470 basis points, to 25.1%. Last year, first quarter gross margins were 20.4%. Gross margins increased for a variety of reasons—primarily a decrease in sales incentives, an increase in average selling prices, and a greater emphasis on the higher-margin communities (particularly communities where land was purchased after the housing bust). On the cost side, land costs increased, as did labor and materials.

Lennar Gross MarginsEnlarge Graph

One issue that has bedeviled the builders has been the dearth of skilled labor. One of the effects of the long housing bust has been an exodus of skilled construction workers, who were unemployed for so long they found new careers in trucking and the energy sector. As a result, wages are beginning to increase, and that will crimp margins going forward. Of course, wage increases will be positive for the economy as a whole, and particularly the homebuilding sector.

Earnings per share

Lennar reported net earnings of $78.1 million (or $0.35 a share) compared to net income of $57.5 million (or $0.26 a share) a year ago. The prior year’s number included an income tax benefit of $3.6 million, which makes the comparison look even better. Lennar Financial Services contributed operating income of $4.5 million, compared to $16.1 million the year before. The slowdown in mortgage origination has not only affected the banks but also builders. Rialto Investments had operating earnings of $2.6 million, and Lennar multi-family had start-up costs of $6.2 million.

Balance sheet

Lennar finished the quarter with cash and equivalents of $646 million. During the quarter, the company did a $500 million senior bond issue with a coupon of 4.5%. The big homebuilders like D.R. Horton (DHI), Toll Brothers (TOL), PulteGroup (PHM), and KB Home (KBH) have been able to access highly attractive financing terms in the capital markets compared to the smaller builders who have to rely on bank financing. In the capital markets, it has definitely been a case of the “haves” versus the “have nots.”

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