The Good Ole Days

I just reviewed earnings for Lennar Corp (LEN) and as expected they were atrocious. I don't mean to pick on them since they have enough problems as it is, but while I was on the company web site, I came across a presentation from a sell side conference back in February 2006. The stock was at $60 back then as you can see below:



One of the slides in the presentation detailed the secular bull case for Housing. The reasons given were:

1) Demographics favor continued strong demand.

2) Land supply is constrained.

3) Strong balance sheet & liquidity drive expansion.

4) Market diversification.

5) Professional management teams.

6) Competitive advantage – economies of scale.

It's astounding to me how many institutional investors bought into this thesis. It's very difficult to resist the call of a bubble.

In defense of Lennar, they did present an alternative scenario in the next slide:

1) Rates rise.

2) Economy falters.

3) Unemployment up.

4) Affordability down.

5) Demand weakens.

6) Margins compressed.

Anyhow, I don't have to tell you how it ended and which scenario won out:






If you look at the last housing cycle for Lennar, it also shows a pretty interesting ride, and a great way to make a lot of money if your timing is right.



Disclosure - No Position in LEN.

Charts courtesy of Big Charts.

Are We There Yet For Homebuilders - An Update?

In September we blogged about the dangers of using stated book value as a buy signal when evaluating Homebuilders for purchase. The original post is here at this link:

Are We There Yet for Homebuilders - Part II?

My advice was not to believe the book values being used in quarterly balance sheets.

"do not use price to book yet as a buy signal. Book value is in flux and will continue to go down quarter after quarter. The safest thing to do is take the latest quarters book value and write off 30% and then slap a .75 multiple on it and then buy them there."

Well, it seems that a 30% haircut is not enough. Lennar Corp filed an 8-K disclosing that it sold some of its lot and land inventory at a haircut of 55% off the book value that Lennar thought it was worth just eight weeks ago.

The full filing can be read here at the SEC site.

The relevant quote is:

"As of September 30, 2007, the acquired properties had a net book value of approximately $1.3 billion and the sales price was $525 million."