Lennar (NYSE:LEN) Continues to Run Through Specs Fast, How Long Can Margins Take it?

Lennar (NYSE:LEN) earnings exceeded Street estimates, but with the fast rate their burning through specs, one wonders how long that can last before margins are affected.

Ticonderoga noted, "LEN reported 4Q earnings. The headline number looks quite good, turning in positive EPS of $0.17. There is plenty to like if one is a Bull, plenty to dislike if one is a Bear. Net, we think the Street will modestly like the results. That is our feeling on the result. We don’t see a meaningful outperformance versus the group.

"Orders were 2,520 including JVs, or 2,496 excluding JVs. That is down 5.5%, which is well ahead of our estimated 14% decline, but below consensus of 2,698. Given that LEN was going up against the last of the Tax Credit last year, we look at this number positively.

"Revenues, at $840M (down 8%), blew out estimates—both ours and the Street’s. The backlog conversion rate was the key, as it was 141% versus our 115% forecast. LEN continues to run through specs aggressively, yet its Gross Margin is none the worse for it. We do not know how long it can keep up this treadmill, which makes us nervous, but kudos again this quarter.

"The Homebuilding Operating Margin was 3.2%, well ahead of our estimate of 1.5%. Even factoring out a better than expected Land profit, the Operating Margin was still 1.4%. The Gross Margin was 20.8%, 50 bps better than our 20.3% estimate. SG&A benefited nicely from the added volume, as it came in at 16.7% versus our 18.6% forecast."

Lennar closed Tuesday at $20.24, gaining $1.34, or 7.09 percent. Ticonderoga has a price target of $21 on the company.