Average selling price is not so luxurious
Lennar Corporation (LEN) delivered 21,003 homes in fiscal year 2014 at an average selling price of $326,000. This compares to 18,290 deliveries in 2013 at an average price of $290,000.
Homebuilding East has always delivered the highest number of homes (37.3% of the total in 2014) compared to Lennar’s other segments. Homebuilding West came in second with a share of 19.7%. Homebuilding Central took the third spot with 15% of total deliveries.
Lennar’s average selling price has seen a sustained increase, which is in line with D.R. Horton (DHI). But it’s still on the lower end of the price point compared to competitors such as Toll Brothers (TOL) and NVR, Inc. (NVR) that provide luxury homes to its customers.
Toll Brothers (TOL), for example, has much lower deliveries of 5,397 in fiscal year 2014 but at a much higher average price of $725,000. Lennar’s strategy is to focus on delivering single-family attached and detached homes in the middle price range while acquiring a large number of customers. This helps Lennar maintain its higher gross margin, as we’ll see in the next article.
Backlog of homes
Backlog represents the number of homes a company has under sales contracts. Sales contracts generally come with deposits. In some instances, purchasers are permitted to cancel sales contracts if they fail to qualify for financing or for certain other reasons.
Lennar’s (LEN) backlog of homes amounted to $1.97 billion or 25.3% of revenue in 2014. This compares to $1.62 billion or 27.3% of revenue in 2013. The company experienced a cancellation rate of 17% in 2014, which was in line with the historical trend and well below cancellations from 2006 through 2009.
The company expects to deliver a substantial number of homes currently in backlog in fiscal year 2015. That will substantially boost Lennar’s top line as well as its bottom line.
An increase in a company’s bottom line and margin growth positively affects a company’s stocks. This, in turn, boosts returns of ETFs such as the SPDR S&P Homebuilders ETF (XHB) and the iShares Dow Jones U.S. Home Construction Index Fund (ITB).