Kellogg Reports Unimpressive Earnings

While the bull market in consumer stocks has slowed a bit over the past quarter, and Kellogg's (NYSE:K) performance has trailed others like General Mills (NYSE:GIS) and Post (Nasdaq:POST), the stock was still trading quite close to its 52-week high prior to its second quarter report. Unfortunately for shareholders, organic growth came in pretty weak. While the second half should be stronger from a margin perspective, a high valuation and less impressive growth trajectory could put these shares on ice for a couple of quarters.

Where Did The Volume Go?
Kellogg's top line came in weaker than expected, as 7% reported revenue growth was below the 10% average estimate, and the underlying organic growth (0.5% contraction in this case) was likewise about 300bp shy of the target. It would seem that volume was the culprit, as it declined 1.6% while most analysts seemed to be forecasting growth.

SEE: How To Decode A Company's Earnings Reports

Sales were particularly weak in the U.S., where revenue contracted 1.6% on an organic basis, as both morning foods and snacks declined more than 3% on an organic basis. It's worth mentioning, though, that Kellogg's "North America Other" category grew almost 4%, and this business includes lines like Eggo Wafflers and Special K Flatbreads that I would think would otherwise be part of "Morning Foods".

Margins were pretty good, though, and kept the bottom-line result on track. Pro-forma gross margin was down about 140bp from last year, but basically in line with expectations. SG&A spending came in lower than expected (likely due in part to advertising/promotion timing), and reported operating income rose 10%, though organic growth was a much less impressive 3%. I do think it's worth pointing out, though, that the reported operating margin of every reported segment improved other than for Latin America.

Shares Comes, Share Goes
I don't want to make Kellogg's results appear better than they were, but I think it's worth remembering that quarter-to-quarter performance in the packaged foods sector can be more volatile than many investors believe. From the timing of promotions and ad campaigns to product launches and ordering trends, there can be quite a bit of noise.

That said, I expect some concern about the company's cereal business and its share relative to General Mills, though General Mills boosted its ad spending in the last quarter. Kellogg is trying to be innovative here (including new breakfast shakes and product line extensions like peanut butter Pop Tarts), but yogurt, particularly Greek yogurt, seems to be pretty popular with adults these days, and that could drive sales to the likes of General Mills and PepsiCo (NYSE:PEP) (the latter has a yogurt JV between Quaker Foods and Theo Muller).

The organic decline in snacks is a little more troubling to me. Kellogg has been targeting rivals like PepsiCo and Mondelez (Nasdaq:MDLZ) with new cookie, cracker, and chip products, but there's clearly still work to do here. Given how much Kellogg paid for Pringles, underperformance in snacks is likely to get punished disproportionately by the market on a long-term basis in terms of management confidence and the resulting discount rates.

Better Margins, But What About Volumes?
Kellogg analysts and investors have been looking forward to a strong second half for a while, as commodity costs should reverse to effective deflation and the costs tied to the Pringles deal abate. While I do believe the margins will improve, the recent declines in ag prices do have me a little concerned about Kellogg's growth potential. Ag commodity price declines often correlate with weaker economic conditions and if the economies in North America and Western Europe slow, that will likely take a toll on Kellogg's volumes.

SEE: Food Stocks For The Long Run

The Bottom Line
The very early reaction to Kellogg's earnings report has been pretty moderate, so I don't see a significant opportunity in the shares right now. Even with my estimate of nearly 7% long-term free cash flow CAGR, it's for me to argue for paying more than about $67 for these shares. That does suggest that Kellogg shares are technically undervalued as of this writing, and very few consumer stocks are. Still, while Kellogg's is one of my favorite consumer goods names, I think valuations in this sector are still high on a historical basis, and I'd be careful about taking long-term positions at these prices.

Disclosure – At the time of writing, the author had no positions in any stocks mentioned.

Balanced View on DDR - Analyst Blog

On Jul 11, 2013, we reiterated our long-term recommendation on DDR Corp. (DDR) – a retail real estate investment trust (REIT) – ­­at Neutral. The decision is based on its strong fundamentals and successful portfolio repositioning activity in the past quarters. However, DDR's significant development pipeline and its reliance on few tenants remains our matter of concern.

Why the Reiteration?

DDR has a well-diversified portfolio, concentrated mostly in prosperous regions. This drives value and mitigates operating risks by generating relatively steady revenues over the past years. In addition, its ongoing aggressive capital recycling program through strategic asset management is expected to be accretive to its earnings going forward. Also, the company has a healthy balance sheet with adequate liquidity.

However, DDR's active development pipeline exposes it to various risks such as rising construction costs, entitlement delays and lease-ups. This remains a plausible concern for the company, going forward. In addition, DDR relies only on a few chief tenants – such as Wal-Mart Stores Inc. (WMT) and The TJX Companies, Inc. (TJX) – for annualized rental revenue generation. Therefore, it is subject to risks resulting from any changes in these tenants' business and financial condition.

Over the last 60 days, the Zacks Consensus Estimate for 2013 FFO (funds from operations) per share remained unchanged at $1.10. On the other hand, for 2014, it nudged up 0.8% to $1.19. Consequently, DDR now carries a Zacks Rank #3 (Hold).

DDR is scheduled to report its second-quarter 2013 earnings on Jul 31, 2013, after the closing bell. The Zacks Consensus Estimate for FFO per share for the upcoming quarter is pegged at 27 cents per share. The earnings ESP (Read: Zacks Earnings ESP: A Better Method) for DDR is 0.00% for the second quarter. This, along with its Zacks Rank #3 (Hold), reduces the chances of a positive earnings surprise.

Other Stock to Consider

Another Retail REIT that is currently performing better is The Macerich Company (MAC), which has a Zacks Rank #2 (Buy).

Note: FFO, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.

Swiss Consolidate Varian Eclipse - Analyst Blog

Recently, Varian Medical Systems (VAR) disclosed the successful consolidation of its Eclipse treatment planning system with Elekta linear accelerators. This unique integration of software and equipment will enable Varian to provide VMAT treatments at Swiss-based Kantonsspital St. Gallen.

Kantonsspital St. Gallen is a well-regarded public hospital in Switzerland. More than 1,200 cancer patients from north-eastern Switzerland receive treatment at the hospital annually. The consolidation has already been used for advanced patient treatment. The first patient to be treated with the integrated solution at the Swiss hospital was an 83-year-old patient suffering from non-Hodgkin's lymphoma.

This should expand Varian's solid foothold in Switzerland. As the company expands its installed base in the country, we expect revenues to grow further. Evidently, overseas demand is strong for Varian's high energy cancer treatment machines.

According to medical experts at Kantonsspital St. Gallen, the consolidation will serve the hospital's need for brisk volumetric modulated arc treatments in radiation oncology. This should improve patient volume and standards of care over time. As per management, the integration of Eclipse with Elekta linear accelerators should support advanced cancer treatment.

We believe that Varian is poised to increase its market share in radiation oncology. International markets are adjudged to be too under-equipped to address the growing incidence of cancer. Given the rising demand for cancer treatment in the overseas market, stronger overseas presence should increase Varian's ex-U.S. sales.

Moreover, Varian continues to post decent results despite the contagion of economic problems in Europe and sustained softness in certain end markets. The company delivered positive earnings surprises in the last 4 quarters with an average beat of 3.64%. Varian is slated to release third-quarter fiscal 2013 earnings results on Jul 24.

On the tepid si! de, Varian competes with well-funded competitors for a limited pool of sales volume. Pricing pressure in emerging markets adversely affects margins. The macro problems in Europe may also affect its growing international franchise.

The stock carries a Zacks Rank #4 (Sell). Other medical stocks such MAKO Surgical Corp. (MAKO), Edwards Lifesciences Corp. (EW) and Natus Medical Inc. (BABY) are worth considering. These stocks carry a Zacks Rank #2 (Buy).

Symetra Upgraded to Strong Buy - Analyst Blog

On Jul 6, 2013, Zacks Investment Research upgraded Symetra Financial Corporation (SYA) to a Zacks Rank #1 (Strong Buy) in view of the scheduled divestiture of the Symetra Investment Services (SIS) which is expected to bring long-term profitability for the company.

Reasons for Upgrade

In Jun 2013, Symetra Financial entered into an agreement with John Hancock, an operating unit of Manulife Financial Corporation (MFC) to divest one of its subsidiaries, Symetra Investment Services. SIS was not a much profitable unit of SYA and thus the company decided to divest it. Apart from fetching cash this divestiture is expected to help the company concentrate on core operations, thereby boosting profitability.

Besides, Symetra Financial continues to increase shareholders' value through dividend payouts and share repurchases. In May this year, Symetra Financial declared a cash dividend of 8 cents per share which represents a 14.3% hike over its previous dividend level. Earlier in the first quarter, the company deployed $4.2 million to repurchase 0.3 million shares.

The company has beaten the Zacks Consensus Estimates in two of the past four quarters. Its first-quarter 2013, results were strong, including an 8.8% positive earnings surprise.

The Zacks Consensus Estimate for 2013 increased 2.2% to $1.41 per share as many estimates were revised upwards over the last 90 days, reflecting a year-over-year increase of 5.5%. Over the same time frame, the Zacks Consensus Estimate for 2014 increased 2.7% to $1.51 per share, representing a year-over-year increase of 6.8%.

Symetra Financial is scheduled to release its second quarter 2013 earnings results on Jul 24, 2013. The Zacks Consensus Estimate for the second quarter 2013 is currently pegged at 34 cents per share.


Other Stocks to Consider

Among other stocks, StanCorp Financial Corporation (SFG) carrying a Zacks Rank #1 (Strong Buy) and China Life Insurance Co. Ltd. (LFC) carrying a Zacks Rank #2 (Bu! y) appear impressive.

Top Dividend Companies To Buy Right Now

If consistency is what you want, then the announcement by�Lufkin Industries� (NASDAQ: LUFK  ) �that�it will pay a�quarterly cash dividend�of�$0.125 per share on June 10 to shareholders of record at the close of business on June 3, is what you want. The oilfield industry services provider has paid that rate consistently every quarter for the last five years. It has paid a quarterly dividend every year since 1990.

The new dividend annualizes to $0.50 per share, and yields 0.6% at the closing price of Lufkin Industries' stock on May 2.

LUFK Dividend data by YCharts

More Expert Advice from The Motley Fool
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Top Dividend Companies To Buy Right Now: Cummins Inc.(CMI)

Cummins Inc. designs, manufactures, distributes, and services diesel and natural gas engines, electric power generation systems, and engine-related component products worldwide. It operates in four segments: Engine, Power Generation, Components, and Distribution. The Engine segment offers a range of diesel and natural gas powered engines under the Cummins and other customer brand names for the heavy-and medium-duty truck, bus, recreational vehicle, light-duty automotive, agricultural, construction, mining, marine, oil and gas, rail, and governmental equipment markets. This segment also provides new parts and service, as well as remanufactured parts and engines. The Power Generation segment offers power generation systems, components, and services, including diesel, natural gas, gasoline, and alternative-fuel electrical generator sets for use in recreational vehicles, commercial vehicles, recreational marine applications, and home stand-by or residential applications. This segment also provides components that make up power generation systems, such as engines, controls, alternators, transfer switches, and switchgears. The Components segment supplies filtration products, turbochargers, aftertreatment systems, intake and exhaust systems, and fuel systems for commercial diesel applications. This segment offers filtration and exhaust systems for on-and off-highway heavy-duty and mid-range equipment, as well as supplies filtration products for industrial and passenger car applications. This segment also develops after treatment and exhaust systems to help customers meet emissions standards and fuel systems. The Distribution segment provides parts and services, as well as service solutions, including maintenance contracts, engineering services, and integrated products. The company sells its products to original equipment manufacturers, distributors, and other customers. Cummins Inc. was founded in 1919 and is headquartered in Columbus, Indiana.

Advisors' Opinion:
  • [By Jonas Elmerraji]

    Diesel engine maker Cummins (CMI) has posted reasonably perfunctory performance year-to-date, climbing 11.75% since the calendar flipped over to January. But zoom out a bit more, and CMI's rally from October looks a whole lot more impressive: Shares are up 38% since Oct. 11.

    Now this stock looks well-positioned for another big leg higher.

    Cummins is currently in the process of forming a long-term ascending triangle pattern, a price setup that's formed by horizontal resistance above shares at $121 and uptrending support to the downside. Essentially, as CMI bounces in between those two technical levels, it's been getting squeezed closer and closer to a breakout above that resistance price. When that breakout happens, we've got a buy signal for shares.

    Over the course of this setup, the 200-day moving average has acted like a proxy for support. That's where I'd recommend keeping a protective stop after the breakout.

  • [By Matthew Scott]

    While trucking manufacturing Cummins (NYSE: CMI) is hardly a sexy stock, fleets of environmentally friendly trucks will be essential for many world economies to remain competitive as they slowly make their way out of the last recession. The price of Cummins’ stock has increased more than five and a half times in two years, jumping from $19.09 on March 9, 2009 to $109.62 at the end of the first quarter this year. As world economies begin to improve, transportation companies will begin replacing trucks so that they can move higher volumes of products more efficiently, and Cummins will benefit.

Top Dividend Companies To Buy Right Now: Philip Morris International Inc(PM)

Philip Morris International Inc., through its subsidiaries, engages in the manufacture and sale of cigarettes and other tobacco products in markets outside of the United States. Its international product brand line comprises Marlboro, Merit, Parliament, Virginia Slims, L&M, Chesterfield, Bond Street, Lark, Muratti, Next, Philip Morris, and Red & White. The company also offers its products under the A Mild, Dji Sam Soe, and A Hijau in Indonesia; Diana in Italy; Optima and Apollo-Soyuz in the Russian Federation; Morven Gold in Pakistan; Boston in Colombia; Belmont, Canadian Classics, and Number 7 in Canada; Best and Classic in Serbia; f6 in Germany; Delicados in Mexico; Assos in Greece; and Petra in the Czech Republic and Slovakia. It operates primarily in the European Union, Eastern Europe, the Middle East, Africa, Asia, Canada, and Latin America. The company is based in New York, New York.

Advisors' Opinion:
  • [By Michael Brush]

    Philip Morris International (PM) has a dividend yield of 3.7%.

    This company is the world's second-biggest cigarette seller, after China National Tobacco. Philip Morris International controls the rights outside the United States to such brands as Marlboro, Virginia Slims and Parliament. So it's positioned to sell more cigarettes as smokers in rapid-growth emerging markets earn more and trade up to premium brands.

     

    Insiders continue to buy the stock, suggesting room for further appreciation. And, of course, tobacco's addictive nature assures steady revenue. If you oppose smoking for moral, health or other reasons, this stock is not for you. As an ex-smoker, I'd understand.

Best Cheap Stocks To Own For 2014: Torch Energy Royalty Trust(TRU)

Torch Energy Royalty Trust, a grantor trust, holds net profits interests, to receive payments from the working interest owners. Its working interest owners include Torch Royalty Company, Torch E&P Company, Samson Lone Star Limited Partnership, and Constellation Energy Partners LLC. The trust is entitled to receive 95% of the net proceeds attributable to oil and natural gas produced and sold from wells on the underlying properties, including Chalkley Field in Louisiana; the Robinson?s Bend Field in the Black Warrior Basin in Alabama; Cotton Valley Fields in Texas; and Austin Chalk Fields in central Texas. Torch Energy Royalty Trust was founded in 1993 and is based in Wilmington, Delaware.

Top Dividend Companies To Buy Right Now: Telefonica SA(TEF)

Telefonica, S.A. provides fixed and mobile telephony services primarily in Spain, rest of Europe, and Latin America. Its fixed telecommunication services include PSTN lines; ISDN accesses; public telephone; local, domestic, and international long distance and fixed-to-mobile communications; corporate communications; video telephony; supplementary and business-oriented value-added services; network services; leasing and sale of handset equipment; and telephony information services. The company?s Internet and broadband multimedia services comprise Internet service provider service; portal and network services; retail and wholesale broadband access; narrowband switched access to Internet; naked ADSL, a broadband connection; residential-oriented value-added services; companies-oriented value-added services; television services, such as IPTV, cable television, and satellite television; and Fiber to the Home, a service for high speed Internet access and digital video recording. Its data and business-solutions services principally include leased lines; virtual private network services; fiber optics services; the provision of hosting and application; outsourcing and consultancy services; desktop services; and system integration and professional services. The company?s wholesale services for telecommunication operators primarily comprise domestic interconnection services; international wholesale services; leased lines for other operators? network deployment; local loop leasing under the unbundled local loop regulation framework; and bit stream services. It also offers various mobile and related services and products that include mobile voice services, value added services, mobile data and Internet services, wholesale services, corporate services, roaming, fixed wireless, and trunking and paging services. The company has a strategic alliance with China Unicom (Hong Kong) Limited. Telefonica, S.A. was founded in 1924 and is headquartered in Madrid, Spai n.

Advisors' Opinion:
  • [By Conrad]

    Telefonica (TEF) is acting within the foreign telecom services industry. The company has a market capitalization of $89.2 billion, generates revenues in an amount of $85.4 billion and a net income of $13.0 billion. It follows P/E ratio is 6.8 and forward price to earnings ratio 8.1, Price/Sales 1.0 and Price/Book ratio 3.1. Dividend Yield: 10.1 percent. The return on equity amounts to 48.1 percent.

Lisa Rapuano of Lane Five Capital: Value Investing with a Contrarian Bent; Corinthian colleges Undervalued

Lisa Rapuano is the founder of Lane Five Capital, a $100 million dollar hedge fund based in Italy. Lisa follows the idea of contrarian value investing. This is the notes taken from her presentation in Value Investor's Conference in Omaha, on the day before the annual meeting of Berkshire Hathaway.

Two categories of Contrarian Value Investing:

1. Great business at great prices due to short term problems

a. What we call compounder"
b. Ideal investments
c. Not often severely mispriced
d. Not always as great as they might have seemed
e. Priced paid for these business rarely truly account for these risks
f. Low probability does not equal no probability

2. Out-of-favor

Hunting for contrarian investments. Area to search

1. New low list
2. High daily percentage downward price action
3. Elevated volume
4. Sell-side downgrades
5. High short interest

Characteristics of potentially successful candidates:

a. Formerly good business model
b. Formerly high valuation
c. Competitors with better margins, growth, efficiency exists.
d. Sign of capitulation: shareholder turnover, disgust, management credibility in question.
e. No visibility; no catalyst
f. Specious or competitive decline arguments

An example of her favorite: Corinthian Colleges (COCO). It is one of the largest for-profit colleges. Stocks have declined 80% during the past 3 years due to the regulatory change of the industry. Why she likes it?

1. For profit education
2. Low-end vocational schools
3. Regulatory pressures, cyclical issues, short seller's playground
4. Negative reputations, negative press coverage

1. Massive mispricing due to the emotional reaction
2. Late 2011 rumors of bankruptcy abounded. Company was generating cash, had sellable assets, would meet coverage and likely could pay off all debt by 202, not a solvency issue
3. Two-year overhang of new gainful employment regulations i! s lifting; companies have improved, adjusted marketing, lowered price, focused on outcomes
4. Vocational programs provide a huge benefit to the nation –l

Valuation:

1. $300 million

a. $210 million from operating cash flow
b. $100 million free cash flow

2. Regulatory risks still high, still reactive to headline risk, high beta, short-heavy, story oriented stocks.

3. Valuation hooks

a. Value of $300 million
b. Ability to close schools, shrink to maximize free cash flow

What can go right:

1. Vocational abandoned by competitors
2. CDR's dropped to well below risky levels
3. Community colleges under fiscal strain
4. Efficiency in financial aid expenses, bad debt management, enrollment dramatically enhanced
5. Operating leverage from optimizing fixed assets
6. Regulatory environment could not less bad

Earnings power, free cash flow under scenario analysis

1. Current valuation discounts seriously impaired business model, but not absolute worst case
2. Past regulatory jihad's have ended with stronger businesses
3. With zero growth, value range from $8.5 - $10 as OPM ranges from 5-7%
4. With modest growth, value range from $9-$25 as OPM ranges from 7-15%
5. Previous operating profit margin high of 18.5%
6. Probability weighted value $10

A Simple Way to Spot Value Traps: Nokia, RadioShack and RIMM

Dr. Paul Price wrote an article called Wake-Up Calls Often Come Too Late. He discussed the collapses of the stock prices with Green Mountain Coffee (GMCR), Netflix (NFLX) and Soda Steam (SODA). As pointed correctly out by Adib Motiwala, value investors are rarely hurt by companies like Green Mountain Coffee, Netflix and Soda Steam. The reason is simple. These stocks are usually traded at extremely high valuation and value investors would normally avoid the situations like these. Value investors are much more likely hurt by the stocks like Nokia (NOK), RadioShack (RSH) and Research-in-Motion (RIMM) as these stocks have been traded for very low valuations. Value investors thought that they were buying into value, while they were actually buying into value traps. The valuation just gets lower, and lower.

Spotting value traps has been discussed extensively. Our columnist The Science of Hitting wrote an excellent piece: Avoiding Value Traps: A Four Question Test. While asking questions such as "What are the odds that this company will not be around ten years from today?" or "What is the company's sustainable competitive advantage?" will certainly help you avoid value traps, but you cannot always get a straight answer for those questions.

One easy way to avoid getting hurt by the companies such as Nokia (NOK), RadioShack (RSH) and Research-In-Motion (RIMM) is to look at their profit margins. We will look at each case below:

RadioShack (RSH)

This is the annual gross margin of RadioShack:



Clearly, RadioShack's gross margin has been in consistent decline since 2004. The decline of the profit margin eventually dragged the company into its recent loss. While RadioShack's profit margin was declining, its earnings per share (EPS), the most important indicator to Wall Street was relatively stable for years as the company continues to buy back shares:



Eventually the stock lost more than 90% over the last five years.

Nokia (NOK)

I! f RadioShack is relatively easy to avoid as it is a retailer without clear competitive advantage, Nokia was once a household name for cell phones. The stock has lost 95% over the past five years. How could value investors avoid investing in Nokia as the stock was traded at a reasonable P/E ratio of 10 in 2008? Evidently some of the value Gurus we track did buy into Nokia.

Again, let's look at the profit margins of Nokia:



Nokia's gross margin has been in steady decline. The rate of decline is about 3.36% a year over year for the past 10 years. While its gross margin was declining way before 2007, its revenue and earnings per share kept climbing:



Investors were celebrating the increase of the revenue and earnings and pushed the stock price to $40. But the decline in profit margin eventually took the company to a deep loss. The stock is now traded at less than $2.

Research-In-Motion (RIMM)

Research-In-Motion is a high-profile case as renowned investor Prem Watsa bought into the company and sits on the company's board. The stock was traded at above $140 in 2008. It has since lost more than 95%, traded at single digits and still sinking.

Again let's take a look at its gross margin:



While BlackBerry was a must-have in the corporate world, the profit margin of Research-In-Motion has started to decline. This was well before Apple (AAPL) released its first iPhone. Again as pointed by Adib, value investors did not buy into RIMM while it was traded at $140 because the P/E ratio then was 45. Value investors bought into RIMM while it was traded at $30-40 because the P/E ratio was at 10. This was in 2009 and the decline in profit margin had been happening for three years.

Why You Should Avoid Margin Decliners?

The reason is simple. The company is losing its price power or it never had price power. Competition is eating into its market.

Will the profit margin of these companies ever recover sustainably? That is a �! ��too-har! d" question. We should avoid situations where we have to answer this question.

Will these companies ever become good investments? They may. But not until they become net-nets.

The Power of Margin Expansion

On the other hand, if a company can expand its profit margin, it has a competitive advantage. A good example here is Apple (AAPL), which is the king of all margin-expanding companies:



We all know what has happened to the stock of Apple.

What's Next?

GuruFocus will release a feature called "Warning Signs" which will warn you about the problems a company may have, including margin declines.

In the meantime, our new "All-In-One Screener" allows you to screen for the companies that can expand profit margins or those with declining margins. Those with expanding profit margins (think Apple) at reasonable prices will mostly likely be rewarding. Those with declining margins (think RIMM, Nokia) are probably good short candidates.

Try our "All-In-One Screener." A new version was released this week and it now has more than 120 filters including one called "Gross Margin Growth Rate."


Related links:Wake-Up Calls Often Come Too LateAdib MotiwalaThe Science of HittingAvoiding Value Traps A Four Question TestPrem WatsaNet-netAll-In-One Screener

Is Lennar A Buy Here?

homes

With shares of Lennar (NYSE:LEN) trading around $35, is the stock an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let's analyze it with the relevant sections of our Cheat Sheet investing framework:

T = Trends for a Stock’s Movement

Lennar is a home builder and a provider of financial services as well as 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. Lennar operates in several segments: homebuilding east, homebuilding central, homebuilding west, homebuilding Southeast Florida, homebuilding Houston, financial services, and Rialto. The homebuilder industry has seen rising demand in the past couple of years that has driven profits much higher for these companies. Look for a homebuilder recovery to continue, and companies such as Lennar to increase profits.

T = Technicals on the Stock Chart are Mixed

Lennar stock has seen an explosive move toward higher prices in recent years. The stock is now pulling back and digesting gains experienced during its latest run, so it may need some time. Analyzing the price trend and its strength can be done using key simple moving averages: 50-day (pink), 100-day (blue), and 200-day (yellow). As seen in the daily price chart below (source: Thinkorswim), Lennar is trading below its rising key averages, which signals neutral to bullish price action in the near-term.

LEN

Taking a look at the implied volatility and implied volatility skew levels of Lennar options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Lennar Options

43.69%

70%

68%

What does this mean? This means that investors or traders are buying a significant amount of call and put options contracts as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

July Options

Flat

Average

August Options

Flat

Average

As of Wednesday, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a significant amount of call and put option contracts, and are leaning neutral to bullish over the next two months.

E = Earnings Are Improving Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. The last four quarterly earnings announcement reactions also help gauge investor sentiment on Lennar’s stock. What do the these quarterly earnings and year-over-year revenue growth figures for Lennar look like and, more importantly, how did the markets like these numbers?

2013 Q2

2013 Q1

2012 Q4

2012 Q3

Earnings Growth (Y-O-Y)

-70.39%

225.00%

259.30%

263.60%

Revenue Growth (Y-O-Y)

53.31%

36.57%

41.70%

34.09%

Earnings Reaction

0.68%

4.78%

-0.82%

-1.46%

Lennar has seen improving earnings and rising revenue figures during the past four quarters. From these numbers, the markets have been pleased with Lennar’s recent earnings announcements.

P = Poor Relative Performance Versus Peers and Sector

How has Lennar stock done relative to its peers – KB Home (NYSE:KBH), DR Horton (NYSE:DHI), PulteGroup (NYSE:PHM) — and sector?

Lennar

KB Home

DR Horton

PulteGroup

Sector

Year-to-Date Return

-7.63%

24.05%

4.15%

4.30%

9.29%

Lennar has been a relatively poor performer, year-to-date.

Conclusion

Lennar is a homebuilder that is experiencing consistent growth after the 2008 housing bubble burst. The stock has been on a powerful run higher but is now pulling back and digesting gains from its recent move. In the past four quarters, investors have been pleased; earnings have been improving and revenue figures have been rising. Relative to its peers and sector, Lennar has been a poor year-to-date performer. WAIT AND SEE what Lennar does this coming quarter.