Lennar Corporation Retreats From Recent Highs After Reporting Mixed Results
In this segment from Market Foolery, Chris Hill is joined by Bill Barker as theydiscuss what Lennar Corporation's (NYSE: LEN)first quarter numbers say about the state of the housing market.
Homebuilder confidence may be at a 12-year high, but investors must not forget the cyclical nature of this industry.
A full transcript follows the video.
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This video was recorded on March 21, 2017.
Chris Hill:Firstquarter profits littlebetter than expected, overall revenue wasa little lower than expected, shares down a bit, but that's off of what isessentially a 52-week high. How are we doing when it comes to home builders?
Bill Barker: Home buildersmost recently reported, for the March numbers, thehighest level of home builder confidence in 12 years.
Hill: Is that good?
Barker: They think things are good. Itmay be the case that it's a good question to ask whetherconfidence means that things are going to go well,because that has not always been the case. Ifyou reflect back to 12 years ago in 2005, that was a really good time to start getting out of home builders, andcertainly you wanted to be out of them by 2007. Lennar had apretty good quarter. It's up over 20% for the year, and a lot of the expectations were priced in prior to today's release,more or less on track with what they guided to.
Hill: Not that we're making big industrywide calls here,but it seems like for the last few quarters, whether we'vetalked about Lennar orToll Brothersor any of the big home builders, generally the results were good. If you are the average investor justoccasionally taking in headlines about housing,it all seems to be going in the right direction. I guess my question is, is now the time to maybe take a pause, and if you're thinking about home builders, maybe think twice?
Barker: Let'sgo over a couple of the numbers andanswer it that way. Deliveries for the quarter were up 13%, and orders were up 16%. The backlog is now up 24% to last year, andrevenue is up 17%. Those are numbers, high teens and above numbers, which, if you compound them out, get you really rich over periods of time.
Hill: Onequick question. Backlog refers to what? Is thatorders that haven't been fulfilled yet?
Barker: Yeah,what they have ordered that --
Hill: "Wehaven't built the homes, but we have the orders for them."
Barker: Yeah. These aren'tbrand new orders, these are the new orders plus the old new orders that theyhaven't done anything about. So this is what they have to do, this is what they're going to be working on, this backlog. So, that's all very good, and if these numbers compounded the waynumbers of some companies compound over time, as you say,you get very rich. But,as we know,there is almost nothing more cyclical than home building, which boomed and crashed and it's not hardto remember exactly when those things happened,and what the consequences of them were. There's been a lot of regulation in the meantime tohopefully prevent that kind of peak and valley for home buildersand for our economy as a whole. Butit's still going to be a cyclical industry. And right now, the cycle is on the way up.
Hill: Youjust reminded me when you were talking about the confidence of the home builders themselves of themovie version of Michael Lewis's great book, The Big Short. It's aphenomenal movie, for anyone who hasn't seen it,definitely check it out. It goes through thehousing crisis, andprofiles some of the people who saw it coming. But that was -- there are a couple of scenes in there whereyou have the outsider investor, whether it's Dr.Michael Burry or thecharacter that Steve Carell plays, who's looking deep into the data, they see the numbers coming, and then when they talk topeople in the housing industry,it's nothing but sunshine and rainbows. Like, it's all, "Everything's great, the market is going great!" There's a scene where Carell and his team go down to Florida, and a real estate agent isshowing them around and it's looking pretty sketchy.
Barker: So, the market was,and the film shows that parts of the market were seeing things more efficiently than other parts. One thing to remember is, home builders in '07 were already, as stocks, although,that is when work peaked,the stocks were already decliningprecipitously. I think Lennar, to take an example --I'll look this up quickly -- it fell 64% in 2007. We think of 2008 as whenall the trouble started. Home numbers by the beginning of 2008 were already decliningprecipitously,and that was something that investors got out of these in 2007,despite the fact that that was peak sales for the company. It's only now getting back to 2007 annual revenues. 2007, it did $10.1 billion. Over the last 12 months, before today's report, got back to $10.9 billion, after bottoming around $3 billion in 2010 and 2011. So,it was a deep decline, it'smade it all the way back, we'reback to where we started. The company has made money in that time. You'vemade money if you held all the way through. But, it is worth keeping in mind that,when you see these numbers, they are part of a cycle. They're not part of a compounding, better results every year number, which is a different way to invest,a different thing to look for.
Bill Barker has no position in any stocks mentioned. Chris Hill has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.