The Zacks Analyst Blog Highlights: Lennar, Berkshire Hathaway, The Goldman Sachs Group, General Electric and The Dow Chemical

Sep 20, 2011, 09:30 ET from Zacks Investment Research, Inc.

CHICAGO, Sept. 20, 2011 /PRNewswire/ -- announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include: Lennar Corporation (NYSE: LEN), Berkshire Hathaway Inc. (NYSE: BRK.B), The Goldman Sachs Group, Inc. (NYSE: GS), General Electric Company (NYSE: GE) and The Dow Chemical Company (NYSE: DOW).


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Here are highlights from Monday's Analyst Blog:

Lennar Reports Mixed 3Q

Lennar Corporation (NYSE: LEN) reported net earnings of $20.7 million or 11 cents per share in the third quarter of fiscal 2011 ended August 31, 2011, compared with $30.0 million or 16 cents per share in the year-ago quarter. Reported earnings were in line with the Zacks Consensus Estimate of 11 cents per share.

Total revenue in the quarter dropped 1% year over year to $820.2 million, due to poor performance across all the company's reporting segments, except Rialto Investments. However, revenues exceeded the Zacks Consensus Estimate of $811 million.


Revenues from the Homebuilding segment declined marginally year over year to $711.8 million from $718.1 million in the prior year. Home sales increased to $700.6 million from $697.4 million a year ago while land sales plunged to $11.1 million from $20.7 million in the prior-year quarter.

This was attributable to a 3% decrease in new home deliveries (excluding unconsolidated entities) to 2,832 units, partly offset by a 3% increase in the average sale price of homes to $247,000.

Lennar experienced lower deliveries in its East, West and Houston segments while the Central and Other segments saw increases in deliveries during the quarter. New home orders climbed 11% to 2,914 homes with a cancellation rate of 20% during the quarter. Backlog increased 16% to 2,519 homes, mainly reflecting slow improvements in the housing industry.

The segment operating earnings were $27.1 million versus $38.1 million a year ago. Sales incentives offered to homebuyers increased to $33,600 per home (12.0% of home sales) from $30,600 per home (11.3% of home sales) in the year-earlier quarter.

Our Take

A depressed housing industry is the biggest concern for any homebuilder including Lennar. Besides, there is no sign of a speedy recovery. Home sales have declined consistently in each of the first two quarters of the year with a marginal increase in the third quarter. The situation is expected to deteriorate further.

In addition, house prices have been declining continuously, driven by an excess supply of homes in the face of depressed demand coupled with tough competition from pre-owned homes.

Moreover, regulations in the secondary mortgage market as well as a decline in demand for mortgage-backed securities, could force Lennar to pay its borrowers from its own reserves. This would lower its cash reserves and increase its exposure to the risk of default.

But Lennar's efforts to counter the challenge are worth mentioning. The company has done well in its cost-reduction activities that were undertaken to mitigate the impact of the housing and credit market crisis. Moreover, the performance of Rialto Investments is another positive factor for Lennar.

Keeping these in mind, Lennar maintains a Zacks #3 Rank, which translates into a short-term Hold rating.

Buffett Closes Lubrizol Acquisition

Berkshire Hathaway Inc. (NYSE: BRK.B) has completed the timely acquisition of The Lubrizol Corp., a chemical company headquartered in Ohio. The acquisition will cost the company $9.7 billion, at $135 per share. The purchase consideration includes $0.7 billion of the acquired company's debt.

Post-acquisition, Berkshire will continue with its headquarters at Wickliffe, Ohio, and will be led by the current management. CEO Warren Buffett has always managed Berkshire's diverse range of 80 businesses in a manner that requires operating decisions for the various businesses to be made by managers of the respective business units.

Lucrative Lubrizol

Lubrizol is a company which perfectly meets all the criteria that Buffett looks for in an acquisition. It particularly appeared attractive to him because of its consistent long-term earnings growth, a diverse product range and solid management. It had grown its revenue per share at 9.82% for the past ten years.

Lubrizol is a specialty chemicals company, which sells more than 12,000 products in over 100 countries. Its products are used in a broad range of applications, with multiple end-uses such as engine oils, specialty driveline lubricants and metalworking fluids, as well as personal care and over-the-counter pharmaceutical products and performance coatings and inks.

It is believed that demand for the company's products will keep on increasing as environmental cautiousness will lead to greater demand for cleaner burning transportation fuels.

Lubrizol also boasts of solid management under CEO, James L. Hambrick who has been with the company since 1978. He has played a major role in the company's mergers and acquisitions and developing international business in emerging markets.

Given Lubrizol's sound operating fundamentals it is believed that the acquisition will soon be accretive to earnings. 

More Acquisitions Ahead

Buffett has not spent a dime of cash for dividends or share repurchases during the past 40 years. Instead, he has retained all of Berkshire's earnings to strengthen the business. The company's net worth has thus increased from $48 million to $163 billion during the past four decades.

Buffett is known for cherry-picking solid businesses. This has helped him build a conglomerate, which now houses over 80 different businesses. Last year during February 2010, he acquired the railroad company Burlington Northern Santa Fe Corp. for $26.5 billion.

The acquisition turned to be hugely successful as the company witnessed a major contribution to earnings. Berkshire did not make any significant business acquisitions in 2009 and  acquired a number of small businesses in 2008 for a total of $6.1 billion.

In June 2011, Berkshire acquired the noncontrolling interests in Wesco Financial Corporation for $543 million, thereby making it an indirect wholly-owned subsidiary of Berkshire.

With $47.9 billion of cash in the kitty as of the end of June 30, 2011, we expect some more shopping from Buffett in the near term.   

Other Investments

Apart from acquiring companies, Berkshire also holds major equity investments in companies such as The Goldman Sachs Group, Inc. (NYSE: GS), General Electric Company (NYSE: GE), William Wrigley Jr. Company, and The Dow Chemical Company (NYSE: DOW). Last week, however, General Electric said that it is considering redeeming $3.3 billion worth of preferred shares bought by Berkshire in October 2008, during the height of the financial crisis.

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