Lennar Corp, the third-biggest homebuilder in the United States, reported a higher-than-expected quarterly profit and a decline in orders that was less severe than Wall Street had feared, sending shares up more than 8 percent and boosting homebuilder stocks across the board.
Lennar's orders fell sharply following the expiration of a U.S. tax credit that boosted home sales last spring. But the Lennar order decline was not as grim as the decline for the rest of the industry.
This was going to be the bad quarter, with the end of the tax credit, so there will probably be a relief rally that the numbers weren't that bad, FBN Securities analyst Joel Locker said.
Orders fell 15 percent to 2,624 homes due to the April 30 expiration of the tax credit, which induced homebuyers to accelerate their purchases. The decline was exacerbated by unemployment and associated foreclosures that present a cheap alternative to new home purchases, the company said in a statement.
Orders are an indicator of future sales, because homebuilders do not recognize revenue until they deliver a home.
KeyBanc analyst Ken Zener, who has a buy rating on Lennar, had expected a 27 percent decline in orders.
Lennar owed its third-quarter orders to its operations in the most desirable areas of the most desirable markets, such as the mid-Atlantic region; Raleigh, North Carolina; and parts of California, Chief Executive Stuart Miller told analysts on a conference call.
Unlike the housing market more broadly, home prices and demand are stabilizing in those markets, which offer robust job growth and local economies, he said.
Nationally, new home sales fell in the mid-20 percent range during Lennar's third quarter compared with Lennar's 15 percent dip.
MACHINE FOR CAPITAL
The company's distressed land acquisition subsidiary, Rialto, contributed $8 million to the quarter's profits and will continue to do so in future quarters, wrote Raymond James analyst Buck Horne in a note to clients.
Rialto is attracting investor interest, Miller said.
There is a lot of capital to invest but it's not easy to find investment opportunities, he said. This affords us the opportunity to be a machine for capital.
For the third quarter ended August 31, Lennar posted earnings of $30 million, or 16 cents a share, compared with a year-earlier loss of $171.6 million, or 97 cents per share.
Excluding a gain of 3 cents per share due to recoveries from a reserve the company had set aside to cover claims against it for use of faulty Chinese drywall, Lennar earned 13 cents per share, solidly beating analysts' expectations of a profit of 6 cents per share, according to Thomson Reuters I/B/E/S.
Revenue rose 14 percent to $825 million, topping Wall Street's expectations of $777.5 million.
Homebuilders had hoped a sales rebound earlier this year reflected improving fundamental demand rather than just the tax credit.
Last week, Beazer Homes USA Inc (BZH.N) cut its full-year order outlook after the expiration of the tax credit, saying potential buyers remain cautious amid high unemployment and continued foreclosures.
It's still sluggish out there, Miller said on the call. September has seen a slight pickup in traffic, but even that is no cause for a sigh of relief.
On Tuesday, the government will release August's housing starts and permits data, which will likely underscore the recovery's fragility. Economists surveyed by Reuters said starts likely rose slightly, while permits were little changed.
Shares of Lennar ended 8.2 percent higher at $15.14 on the New York Stock Exchange on Monday, while the Dow Jones U.S. Home Construction Index .DJUSHB climbed 4.5 percent.
At Friday's close, the shares had lost 36 percent of their value since hitting a 52-week high in April.