Lennar Corporation (NYSE: LEN) has posted their results for Q1 2020.
Revenue came in at $4.5B which beat the consensus analysts’ estimates of $4.13B
EPS was $1.27 which beat analysts’ estimates of $0.84
However, the focus going forward from here will not be based on what the performance was for this quarter but how the company can expect to weather this current crisis that has been brought upon the global economy by the COVID-19 coronavirus outbreak. It would be difficult to gauge the long term of the crisis on Lennar as it would have to depend on how long the outbreak continues to shutter businesses all across North America.
But First, What Does Lennar Even Do?
Lennar corporation is a real estate and home construction company based in Miami, Florida. The company primarily constructs and sells single-family detached or undetached homes and also dabbles in financial services that are in relation to home buying and real estate such as originating mortgages and trading real estate related securities.
It’s a Bad Time to Run a Business that Consumers Can’t Access While Working From Home
With the ongoing crisis, companies that are in industries like real estate may not fair well, especially if the crisis drags on for longer and people begin to lose their jobs.
In the very short term, expect a huge decline in revenues as most workers in the US go on lockdown and work from home.
In the near term, even if the coronavirus outbreak ends, the effect from this crisis will be felt for many quarters to come.
Investors have sold off stock in Lennar in droves already and the stock, like many others, has lost over half its value in just over a month since the crisis started.
By comparison, competitors such as Toll Brothers (NYSE: TOL) which also engages in homebuilding and similar products and services as Lennar has also seen their stock drop by more than 60% in the past 3 months.
What’s Next For Lennar?
On the conference call, Stuart Miller, the Executive Chairman of Lennar stated that models to predict what might happen to the economy going forward “simply do not exist”.
An associate of Lennar based in Seattle has died from the coronavirus, the colleague in question was one of the first cases of death due to the virus in the United States.
Lennar has committed to pausing all land purchase deals, however, the selling and building homes will still be continuing.
The first quarter was going well for first few weeks before the outbreak as new orders were up 16%, and even now the company has not seen an increase yet in cancellations of home deals that were supposed to close around now
The company is implementing digital solutions to allow customers to do virtual walkthroughs of houses instead of in person visitations in an effort combat the outbreak from spreading.
Measures to cut expenses are expected to be incoming. Measures include pausing investments in land development, and plans to re-phase existing developments and further slowdown of the pace of business is expected in order to meet falling demand.
In response to asset impairments and balance sheet impairments, Miller stated that it was premature to start thinking about those issues as the company is not in any immediate danger of default. Miller stated that if the gross margin drops 50% or more, then impairments will become an issue, but this is not yet an issue.
Management team tried to highlight the positive impact on lower interest rates to their business as lower rates tended to give real estate markets a significant boost.
Miller stated that there are no coordinated efforts to fix prices, assuring everyone that Lennar will not use this crisis to engage in any anti-competitive practices.
At the same time, Lennar is pausing all stock repurchases, and use any extra money to ensure that incoming bond payments are made on time..
As of yet, the company has no plans to draw up on any lines of credit from banks, as it is not in any immediate danger of a cash crunch.
The management team has refused to provide guidance for next quarter in context of the current ongoing crisis. Miller stated that “with safety, health and hygiene first, we are focused on the day to day operation of maintaining the parts of our business that are sustainable, while the national economy is struggling with a deepening pause, in order to ‘flatten the COVID-19 curve.’
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