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 or by reviewing the 5 Most Undervalued Companies for the Defensive Investor – July 2015. 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 stock analysis showing a specific look at how Lennar Corporation (LEN) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Lennar Corporation is a real estate company. The Company is a homebuilder, a provider of real estate-related financial services, a commercial real estate investment, investment management and finance company. It operates under Homebuilding Operations, Lennar Financial Services, Rialto and Lennar Multifamily segments. It has grouped its homebuilding activities into five segments: Homebuilding East, Homebuilding Central, Homebuilding West, Homebuilding Southeast Florida and Homebuilding Houston. Its homebuilding operations include the construction and sale of single-family attached and detached homes. Lennar Financial Services offers residential mortgage loan products to buyers of their homes and others. The Rialto segment is a commercial real estate investment, investment management and finance company. The Lennar Multifamily segment focuses on developing a portfolio of multifamily rental properties in select United States markets. It operates under brand name Lennar.
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Downloadable PDF version of this valuation:
ModernGraham Valuation of LEN – August 2015
Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?
What kind of Intelligent Investor are you?
| Defensive Investor; must pass 6 out of the following 7 tests. | |||
| 1. Adequate Size of the Enterprise | Market Cap > $2Bil | Pass | |
| 2. Sufficiently Strong Financial Condition | Current Ratio > 2 | Pass | |
| 3. Earnings Stability | Positive EPS for 10 years prior | Fail | |
| 4. Dividend Record | Dividend Payments for 10 years prior | Pass | |
| 5. Earnings Growth | Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end | Fail | |
| 6. Moderate PEmg Ratio | PEmg < 20 | Pass | |
| 7. Moderate Price to Assets | PB Ratio < 2.5 OR PB*PEmg < 50 | Pass | |
| Score | |||
| Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor. | |||
| 1. Sufficiently Strong Financial Condition | Current Ratio > 1.5 | Pass | |
| 2. Sufficiently Strong Financial Condition | Debt to NCA < 1.1 | Pass | |
| 3. Earnings Stability | Positive EPS for 5 years prior | Pass | |
| 4. Dividend Record | Currently Pays Dividend | Pass | |
| 5. Earnings Growth | EPSmg greater than 5 years ago | Pass | |
Stage 2: Determination of Intrinsic Value
| EPSmg | 2.62 |
| MG Growth Estimate | 15.00% |
| MG Value | $100.74 |
| Opinion | Undervalued |
| MG Value based on 3% Growth | $37.94 |
| MG Value based on 0% Growth | $22.24 |
| Market Implied Growth Rate | 5.63% |
| Current Price | $51.73 |
| % of Intrinsic Value | 51.35% |
Lennar Corporation qualifies for the Enterprising Investor but is not suitable for the more conservative Defensive Investor.  The Defensive Investor is concerned with the insufficient earnings growth or stability over the last ten years.  The Enterprising Investor has no initial concerns.  As a result, all Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company.
As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from a loss of $1.95 in 2011 to an estimated gain of $2.62 for 2015.  This level of demonstrated earnings growth outpaces the market’s implied estimate of 5.63% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value below the 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 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.
Stage 3: Information for Further Research
| Net Current Asset Value (NCAV) | $5.75 |
| PEmg | 19.77 |
| Current Ratio | 9.41 |
| PB Ratio | 2.33 |
| Dividend Yield | 0.31% |
| Number of Consecutive Years of Dividend Growth | 0 |
Useful Links:
| ModernGraham tagged articles | Morningstar |
| Google Finance | MSN Money |
| Yahoo Finance | Seeking Alpha |
| GuruFocus | SEC Filings |
Most Recent Balance Sheet Figures
| Total Current Assets | $10,085,930,000 |
| Total Current Liabilities | $1,071,693,000 |
| Long-Term Debt | $6,156,552,000 |
| Total Assets | $13,895,460,000 |
| Intangible Assets | $38,854,000 |
| Total Liabilities | $8,756,721,000 |
| Outstanding Shares | 231,041,000 |
Earnings Per Share History
| Next Fiscal Year Estimate | $2.98 |
| Nov14 | $2.80 |
| Nov13 | $2.15 |
| Nov12 | $3.11 |
| Nov11 | $0.48 |
| Nov10 | $0.51 |
| Nov09 | -$2.45 |
| Nov08 | -$7.00 |
| Nov07 | -$12.31 |
| Nov06 | $3.69 |
| Nov05 | $8.23 |
| Nov04 | $5.70 |
| Nov03 | $4.65 |
| Nov02 | $3.51 |
| Nov01 | $0.00 |
| Nov00 | $1.66 |
| Nov99 | $1.25 |
| Nov98 | $1.25 |
| Nov97 | $1.12 |
| Nov96 | $1.22 |
| Nov95 | $0.98 |
Earnings Per Share – ModernGraham History
| Next Fiscal Year Estimate | $2.62 |
| Nov14 | $2.23 |
| Nov13 | $1.55 |
| Nov12 | $0.47 |
| Nov11 | -$1.95 |
| Nov10 | -$3.28 |
| Nov09 | -$4.10 |
| Nov08 | -$3.40 |
| Nov07 | -$0.40 |
| Nov06 | $5.42 |
| Nov05 | $5.66 |
| Nov04 | $3.95 |
| Nov03 | $2.79 |
| Nov02 | $1.75 |
| Nov01 | $0.93 |
| Nov00 | $1.36 |
| Nov99 | $1.20 |
Recommended Reading:
Other ModernGraham posts about the company
Other ModernGraham posts about related companies
Disclaimer:
The author did not hold a position in any 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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