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Lennar's Q2: Further Evidence That Housing Has Bottomed?

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Shares of the third-largest home builder by revenue, Lennar (NYSE: LEN), are seeing increased strength during Wednesday's trading session after the company reported second-quarter results that were better than analysts had expected.

Lennar reported second-quarter EPS of $0.21, versus the estimated $0.17 per share, beating by 23.5%. Revenues came in at $930.2 million, beating the estimated $885.71 million by 5%.

Stuart Miller, chief executive officer of Lennar, said in the company's release, "We are pleased to announce EPS of $2.06 in the second quarter, consisting of $0.21 per share related to our improving fundamental business and $1.85 per share related to the partial reversal of the valuation allowance against our deferred tax assets. These results mark our ninth consecutive quarter of profitability."

Miller continued, "Evidence from the field suggests that the 'for sale' housing market has, in fact, bottomed and that we have commenced a slow and steady recovery process. And while the housing downturn was broad-based and national, the recovery process continues to be very localized. Although highly conservative mortgage lending practices and challenging appraisals remain a constant headwind, we are experiencing net positive price and volume trends in most of our markets."

All this "housing has bottomed" talk should come as no surprise, since both new home sales and the Case-Shiller Housing Index both beat what economists were expecting this week.

Sales of new single-family houses in May 2012 reached a seasonally adjusted annual rate of 369,000, according to estimates released jointly Monday by the U.S. Census Bureau and the Department of Housing and Urban Development.

These results hit a two-year high and beat the 347,000 expected by analysts. In addition, Monday's results were 7.6% above the revised April rate of 343,000 and 19.8% above the May 2011 estimate of 308,000. Investors might consider Monday's reading to be a bullish signal for the U.S. housing market.

According to the S&P/Case-Shiller Survey Home Price Indices, a measure of U.S. home prices, on average home prices increased 1.3% in the month of April for both the 10- and 20-City Composites. This comes after seven-consecutive months of falling home prices as measured by both indices.

Miller concluded, "Looking ahead, our strong balance sheet and significant liquidity, which was enhanced this quarter by our new $525 million unsecured revolving credit facility, continue to position us to capitalize on future strategic opportunities."

Shares of Lennar were trading up about 5% late Wednesday morning.

Traders who believe that housing market has bottomed might want to consider the following trades:

  • Long building companies like PulteGroup (NYSE: PHM) because more new houses being sold might drive construction demand. This potential increase in construction demand may bolster home builders.
  • Long companies like Louisiana-Pacific (NYSE: LPX) that manufacture and distribute products and materials for home construction.
  • Short do-it-yourself stores like Lowe's (NYSE: LOW) or Home Depot (NYSE: HD) because, if new home sales increase, consumers might be less likely to fix up their existing homes.
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