For Subscribers

Get the complete article now!

TWST: Bob, will you set the stage for us by telling us about the size and strength of the homebuilding industry today?

Mr. Curran: This has been a long, robust housing cycle. It began in the early 1990s. A key measure of housing activity is housing starts. Total starts were 1.01 million in 1991 and then advanced or held steady every year since, except in 1995 when starts declined 7%. Total starts apparently peaked at 1.67 million in 1999. Single-family starts troughed in 1991 at 840,000 and ultimately reached 1.34 million last year. I anticipate moderate weakness in starts this year with the total declining 3.9% to 1.60 million and single-family starts decreasing 3.3% to 1.29 million. Total volume could drop a further 1.3% in 2001, with single-family off less than 1%. Nevertheless, whether by the current cycle’s standards or by broader historical measures, the absolute housing levels this year and next are expected to be quite robust. Many building-related companies have consistently benefited from the strength of this cycle — homebuilders, materials and components producers, and distributors — and they are still prospering today. That’s particularly the case for the larger public homebuilders. Those large builders, which I focus on, will all report double-digit increases in their homebuilding profits in the current fiscal year despite spectacular gains last year. As a group they should also report at least a high single-digit increase in earnings next year as well. Although there are a variety of factors that influenced housing demand and supply this cycle, I would single out a consistently growing economy, steadily rising employment and low mortgage rates, especially by historical standards. Mortgage rates at present are below 8% and off approximately 70 basis points from their high earlier this year.

TWST: What’s a strong reason to recommend Lennar (NYSE:LEN)?

Mr. Curran: I agree with Steve’s assessment of Lennar. I would add that Lennar recently acquired U.S. Home, a major builder in its own right. This is the largest acquisition in the history of the industry. Lennar bought U.S. Home below historical book value and much below replacement value. The acquisition is immediately accretive. Although not built into our estimates, it appears that synergies could lead to even stronger earnings impact in 2001 and beyond as a result of this combination. The acquisition further strengthens Lennar’s positions in Florida, Texas and California — its three key markets. It also adds exposure to a variety of other state markets. Although Lennar had dabbled in the active adult/retiree market, the acquisition of U.S. Home puts Lennar into a leading position in this market niche. Only Del Webb has a bigger exposure in active adult/retiree than U.S. Home has. Lennar builds homes that anticipate its customers needs and discourages options. The company labels this “Everything’s Included.” U.S. Home is a more traditional merchant homebuilder that solicits options. With the two companies now one, it is logical to assume that Lennar can turn its land faster by offering its “Everything’s Included” product on some U.S. Home land and vice versa. In addition to all of this, Lennar gets substantial additional land and a solid management team with the U.S. Home acquisition. I would also like to emphasize Lennar’s excellent record over an extended period of time. Over the past three decades the company has been able to consistently report not only higher peak earnings from cycle to cycle, but higher trough earnings as well. Stuart Miller and his management team have done a very good job running the homebuilding operations, following in the footsteps of Miller’s father.