Lennar Corporation Quarterly Stock Valuation – October 2014 $LEN

Lennar_corporation_logoBenjamin 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 or by reviewing the 5 Highest Dividend Yields Among Undervalued Companies for the Defensive Investor – September 2014.  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 Corporation (LEN) 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.
LEN Chart

LEN data by YCharts

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion - PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 - PASS
  3. Earnings Stability – positive earnings per share for at least 10 straight years - FAIL
  4. Dividend Record – has paid a dividend for at least 10 straight years - PASS
  5. 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
  6. Moderate PEmg ratio – PEmg is less than 20 - FAIL
  7. 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 = 5/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 - PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 - PASS
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend - PASS
  5. Earnings growth – EPSmg greater than 5 years ago - PASS

Valuation Summary

Key Data:

Recent Price $40.00
MG Value $66.53
MG Opinion Undervalued
Value Based on 3% Growth $25.06
Value Based on 0% Growth $14.69
Market Implied Growth Rate 7.32%
Net Current Asset Value (NCAV) $5.38
PEmg 23.15
Current Ratio 5.22
PB Ratio 1.79

Balance Sheet – 6/30/2014

Current Assets $8,812,700,000
Current Liabilities $1,689,400,000
Total Debt $5,275,500,000
Total Assets $12,290,100,000
Intangible Assets $38,900,000
Total Liabilities $7,708,600,000
Outstanding Shares 205,200,000

Earnings Per Share

2014 (estimate) $2.65
2013 $2.15
2012 $0.86
2011 $0.49
2010 $0.51
2009 -$2.45
2008 -$7.00
2007 -$12.31
2006 $3.69
2005 $8.17
2004 $5.70

Earnings Per Share – ModernGraham

2014 (estimate) $1.73
2013 $0.95
2012 -$0.27
2011 -$1.94
2010 -$3.28
2009 -$4.11

Dividend History
LEN Dividend Chart

LEN Dividend data by YCharts

Conclusion:

Lennar Corporation qualifies for the Enterprising Investor but not the Defensive Investor.  The Defensive Investor has concerns with the company’s lack of earnings stability or growth over the last ten years along with the high PE ratio.  The Enterprising Investor, however, has no initial concerns.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities.  From a valuation side of things, the company appears to be undervalued after growing its EPSmg (normalized earnings) from a loss of $3.28 in 2010 to an estimated gain of $1.73 for 2014.  This level of demonstrated growth outpaces the market’s implied estimate of 7.32% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value above the price.

Be sure to check out previous ModernGraham valuations of Lennar Corporation (LEN) for better perspective!

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 Corporation (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.

Disclaimer:  The author did not hold a position in Lennar Corporation (LEN) or in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.


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