Options Trade – Lennar Corporation (NYSE:LEN) Calls 
Sunday, March 16, 2014

**OPTIONS TRADE: Buy the LEN May 2014 40.000 call (LEN140517C00040000) at or under $2.40, good for the day. Place a protective stop limit at $0.95 and a pre-determined sell at $5.00.

by Ian Harvey

March 16, 2014


Lennar Corporation (NYSE: LEN), a home builder, reports its fiscal Q1 results before the market opens on March 20, with analysts forecasting earnings of $0.28 per share. In addition to the earnings report, the entire housing industry will react to two important data reports. February housing starts will be announced March 18, and existing home sales will be released two days later on March 20. Lennar stock has gained 4.9% so far this year.

The housing market has improved over recent years, but rising interest rates remain a concern. Last month's reports on January housing starts and existing home sales both showed declines, and while homebuilders were able to trade higher despite the news, another set of disappointing reports could negatively affect housing stocks this time around. However, it is expected that February's numbers will show improvements. Analysts have forecast Lennar to report earnings of $0.28 for its fiscal first quarter, but the rumored number is $0.31, so that is the number to watch for.

Company Details

Lennar Corporation is a homebuilder and a provider of financial services and through its Rialto Investments (Rialto) segment, an investor, and manager of funds that invest in real estate assets. The Company's homebuilding operations include the construction and sale of single-family attached and detached homes, as well as the purchase, development and sale of residential land directly and through unconsolidated entities in which it has investments.

Its homebuilding activities have five segments: Homebuilding East, Homebuilding Central, Homebuilding West, Homebuilding Southeast Florida, and Homebuilding Houston. It has two other segments: financial services and rialto. Its financial services reportable segment provides mortgage financing, title insurance and closing services for both buyers of its homes and others. Rialto segment focuses on real estate investments and asset management.

Key Statistics for LEN

Current P/E Ratio (ttm) 19.6824
Estimated P/E(11/2014) 16.2948
Relative P/E vs. SPX 1.1611
Earnings Per Share (USD) (ttm) 2.0333
Est. EPS (USD) (11/2014) 2.4560
Est. PEG Ratio 3.4915
Market Cap (M USD) 7,968.33
Shares Outstanding (M) 173.11
30 Day Average Volume 4,799,373
Price/Book (mrq) 1.9623
Price/Sale (ttm) 1.2862
Dividend Indicated Gross Yield 0.40%
Cash Dividend (USD) 0.0400
Dividend Ex-Date 01/28/2014
5 Year Dividend Growth -16.74%
Next Earnings Announcement 03/20/2014

Technical Analysis

Lennar has a one year low of $30.90 and a one year high of $44.40. The stock has a 50-day moving average of $41.0 and a 200-day moving average of $36.90.

Technical indicators for LEN are bullish and the stock is in a strong upward trend. The stock has support above $40.40 and resistance below $44.40.

The company has a market cap of $8.296 billion and a P/E ratio of 18.79.


Lennar last posted its quarterly earnings results on Wednesday, December 18th. The company reported $0.73 earnings per share (EPS) for the quarter, beating the consensus estimate of $0.62 by $0.11. The company had revenue of $1.92 billion for the quarter, compared to the consensus estimate of $1.88 billion.

During the same quarter in the previous year, the company posted $0.56 earnings per share. The company’s revenue for the quarter was up 41.8% on a year-over-year basis. On average, analysts predict that Lennar will post $2.47 earnings per share for the current fiscal year.

Future Earnings at Lennar

Lennar's P/E (price/earnings per share) is (19.5) and its projected (forward 12 months) P/E is (17.2). This means that the earnings are projected to improve over the next year. The earnings for the 4th quarter were 73 cents per share. The earnings for the first quarter of 2014 (winter months) was projected at 28 cents per share. The earnings for the 2nd quarter of 2014 (early spring) was projected at 52 cents per share. Naturally, expect the spring earnings to be a little stronger given all the positive fundamentals.

Reasons to Expect an Upbeat Report

There are a few reasons why there is an upbeat feeling about Lennar:-

• The housing market as a whole is moving forward. One reason for optimism is a recent report from the Commerce Department, which indicated new single-family home sales jumped 9.6% in January, reaching the highest annual rate since July 2008.

• A second reason for optimism is that home prices last year made their biggest gain since 2005.

• Lennar remains best-in-breed in mid-range new home construction.

• Forward growth estimates are expecting robust revenue and EPS growth.

• A final reason to be optimistic is a recent earnings report from one of Lennar's competitors, Toll Brothers (TOL), which was better than analysts expected.

Other Positive Factors are…..

1. Fundamental Factors

There are a number of fundamental factors that are pushing stock prices higher at Lennar Corporation. The first factor is the collapse of interest rates instead of the expected run-up of rates with the Federal Reserve cutting its monthly bond purchases (the QE taper). The second factor is the demand for housing from Lennar with a backlog of 4,806 homes, which is up 19%. The third factor is Lennar pricing $400 million of 4.50% Notes due June 2019 for working capital and for general corporate purposes.

2. Collapse of Interest Rates

Housing interest rates have fallen from 4.6% at the beginning of the year to 4.3%-4.4% currently- source Marketwatch.com. This makes mortgages cheaper and cuts housing payments significantly. Many people will want to jump into the housing market to lock in this low rate. This creates more housing demand for Lennar Corporation.

3. Backlog of Homes

The demand for housing from Lennar is great, with a backlog of 4,806 homes as of December 18th. Many more houses will be ordered before spring. Lennar also received $1.4 billion in new orders in the 4th quarter of 2013. Lennar will be building and financing homes at a speedy pace this spring.

4. New Financing

The final reason Lennar will be building homes fast is the $400 million in new financing it just completed. This money will be used for working capital and for general corporate purposes. The loan rate is 4.50 percent interest which is quite reasonable. When news of this financing hit the market in February, the price of Lennar jumped several percentage points. This $400 million in new capital means Lennar will be ready to build as soon as the weather allows.

Analysts Opinions

Investment analysts at Citigroup Inc. hoisted their target price on shares of Lennar from $37.00 to $41.00 in a note issued to investors on Friday. Citigroup Inc.’s target price would suggest a potential upside of 1.61% from the stock’s previous close.

Also, the company has been the subject of a number of research reports:-

• Analysts at KeyCorp downgraded shares of Lennar from a “buy” rating to a “hold” rating in a research note on Tuesday, March 4th. They now have a $41.00 price target on the stock. They noted that the move was a valuation call.

• Separately, analysts at Raymond James downgraded shares of Lennar from a “strong-buy” rating to an “outperform” rating in a research note on Tuesday, February 11th.

• Finally, analysts at Ned Davis Research upgraded shares of Lennar from a “sell” rating to a “neutral” rating in a research note on Monday, February 10th.

One investment analyst has rated the stock with a sell rating, eleven have given a hold rating, ten have assigned a buy rating and one has issued a strong buy rating to the stock. The stock has an average rating of “Hold” and an average target price of $42.72.


Lennar Corporation's price is moving up quickly. A common opinion is that it will soon be challenging its last spring's highs of $44 per share. There are a number of strong fundamental factors that will help push the price of Lennar to new highs. Lennar's forward P/E of (17.2) should help power the rally into late spring.

The feeling is optimism on the housing market as a whole, and it is believed that this month's economic reports and LEN's earnings report will be strong enough to send the stock higher.

Therefore, based on the facts above the following options trade is recommended…..

**OPTIONS TRADE: Buy the LEN May 2014 40.000 call (LEN140517C00040000) at or under $2.40, good for the day. Place a protective stop limit at $0.95 and a pre-determined sell at $5.00.

”Success is simple. Do what's right, the right way, at the right time.”

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Options traders win because they are successful.

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