Thursday, January 13, 2011

Rialto Differentiator for Lennar (NYSE:LEN), Execution Solid

With little to justify the recent boost in the share price of Lennar, Ticonderoga concludes it's Rialto which is the differentiator for them.

Ticonderoga said, "As the equity market testified, LEN’s fiscal 4Q results were solid as this company continues executing in a very tough environment. We believe Rialto is quickly becoming a home run for LEN and, in fact, is the differentiator in the battle among builders. We are not completely sure what the market was rewarding Tuesday when LEN’s share price spiked. However, given that the homebuilding results were pretty much what we expected, we must chalk up the run to Rialto or inattention—and we prefer Rialto.

"For investors to understand how different LEN’s model has become, one has to separate out homebuilding operations from the rest of LEN. Before charges, roughly 40% of its reported $0.17 came from building and selling a home (after charges of $22M, it generated a loss of $0.05 per share or a negative 27% of EPS). Land sales, primarily deferred Land revenue recognized, accounted for a little over 40% of EPS (net of $3.1M in charges). Financial Services accounted for nearly 36% of EPS. Rialto generated about 38% of EPS, while the Tax Refund added about 11% of total EPS. In other words, this quarter, from an EPS standpoint, was really about all of LEN’s other businesses, rather than delivering a home. We want to be clear, we are not knocking LEN on this, just trying to highlight that investors must remember home construction is only one part of this story. Operationally, it is obviously the most important part, but financially it is not for now. Over time, as volumes return, it will once again likely lead the charge."

Ticonderoga maintains a "Buy" rating on Lennar, which closed Wednesday at $20.46, gaining $0.22, or 1.09 percent. Ticonderoga has a price target of $21 on LEN.

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