Lennar Corp (LEN) Quarterly Valuation – April 2014
Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how Lennar Corp fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Lennar Corporation is a homebuilder and a provider of financial services and through its Rialto Investments (Rialto) segment. The Company’s homebuilding operations include the construction and sale of single-family attached and detached homes, as well as the purchase, development and sale of residential land directly and through unconsolidated entities in which it has investments. Its homebuilding activities have five segments: Homebuilding East, Homebuilding Central, Homebuilding West, Homebuilding Southeast Florida, and Homebuilding Houston. It has two other segments: financial services and rialto. Its financial services reportable segment provides mortgage financing, title insurance and closing services for both buyers of its homes and others. Rialto segment focuses on real estate investments and asset management. In April 2014, Lennar Corp’s subsidiary Universal American Mortgage Company acquired certain assets of Pinnacle Mortgage Group, Inc.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
- Earnings Stability – positive earnings per share for at least 10 straight years – FAIL
- Dividend Record – has paid a dividend for at least 10 straight years – PASS
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
- Moderate PEmg ratio – PEmg is less than 20 – FAIL
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 4/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
- Earnings Stability – positive earnings per share for at least 5 years – FAIL
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
Valuation Summary
Key Data:
| Recent Price | $39.62 |
| MG Value | $59.52 |
| MG Opinion | Undervalued |
| Value Based on 3% Growth | $22.42 |
| Value Based on 0% Growth | $13.14 |
| Market Implied Growth Rate | 8.56% |
| Net Current Asset Value (NCAV) | $5.79 |
| PEmg | 25.63 |
| Current Ratio | 11.88 |
| PB Ratio | 1.94 |
Balance Sheet – 11/30/2013
| Current Assets | $8,288,700,000 |
| Current Liabilities | $697,800,000 |
| Total Debt | $5,065,600,000 |
| Total Assets | $11,273,200,000 |
| Intangible Assets | $34,000,000 |
| Total Liabilities | $7,104,300,000 |
| Outstanding Shares | 204,410,000 |
Earnings Per Share
| 2013 | $2.12 |
| 2012 | $3.11 |
| 2011 | $0.47 |
| 2010 | $0.50 |
| 2009 | -$2.26 |
| 2008 | -$7.00 |
| 2007 | -$12.31 |
| 2006 | $3.69 |
| 2005 | $8.17 |
| 2004 | $5.70 |
Earnings Per Share – ModernGraham
| 2013 | $1.55 |
| 2012 | $0.49 |
| 2011 | -$1.92 |
| 2010 | -$3.23 |
| 2009 | -$4.05 |
| 2008 | -$3.41 |
Dividend History
LEN Dividend data by YCharts
Conclusion:
Lennar Corp is an interesting company for the Enterprising Investor, but is not suitable for the Defensive Investor.  The company has shown insufficient earnings stability or growth over the ten year historical period and trades at a high PEmg ratio for the Defensive Investor.  The company company does pass all of the Enterprising Investor’s requirements except the earnings stability requirement.  As a result, Enterprising Investors should feel comfortable proceeding with further research into the company as well as other opportunities through a review of ModernGraham’s valaution of D.R. Horton Inc. (DHI) and 5 Undervalued Companies for the Enterprising Investor.  From a valuation side of things, the company appears to be undervalued after growing its EPSmg (normalized earnings) from -$4.05 in 2009 to $1.55 for 2013.  This level of demonstrated growth outpaces the market’s implied estimate of 8.56% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that is well above the market price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Lennar Corp (LEN)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!
Disclaimer: Â The author did not hold a position in Lennar Corp) or any other company mentioned in the article at the time of publication and had no intention of changing that position within the next 72 hours.
Logo taken from wikipedia; this article is not affiliated with the company in any manner.
