On the fundamental side, LEN is one of the nation’s largest homebuilders. Today they reported results for their third quarter ended August 31, 2012. Third quarter net earnings attributable to Lennar in 2012 were $87.1 million, or $0.40 per diluted share, compared to third quarter net earnings attributable to Lennar of $20.7 million, or $0.11per diluted share, in 2011.

Key metrics to look at include the following…

-Gross Margin expanded 210 bps to 23.2%

-Operating margin improved 440 bps to 11.2%.

-New orders of 4,198 homes – up 44%; cancellation rate of 17%.

-Backlog of 4,513 homes – up 79%;

– And finally Backlog dollar value of $1.3 billion – up 95%

While all these metrics and figures sound just chummy, what explains the price action? Here we could turn to the options market. The $38 straddle was $3.47 as of the close on 09/21/12 or just under 10% of the stock. This is however using the October options, which still have a lot of time value in them; so that is not the best indicator for an event or implied move.

 The next way to possibly explain the price action would be to turn to the analyst community.  Here, the street is rather neutral to bearish on the name. The average price target is $33.69 and most have hold rating. It is interesting to look at the short interest too. The bears account for 20% of the float, meaning 20% of the float is short.  This has however been trending down, short covering, since July 15, 2012 as the short interest has fallen 7.1% as some bears concede defeat.

 Perhaps with the massive 91% gain YTD LEN needs to take a rest and settle down into its moving averages.

Feel free to e-mail any comments, feedback, or general inquiries to:

Author

mark@keeneonthemarket.com

Earnings have stayed steady over the last four quarters, within a range of $0.28 to $0.30 cents. Analysts expect the trend to continue, projecting $0.29 for Q2 and $0.30 for Q3. Overall, 2012 beat estimates by 2% and were up $0.29 from 2011. 2013 earnings are expected to advance $0.09 from 2012, to $1.19. Forbes Magazine rates Red Hat the 4^th most innovative company in the world. The company spends 2.5% of its revenue on research and development. Revenue for 2012 was up 24.6% from 2011, to 1.13 Billion.

RHT is down $0.60 for the day, about 1%, trading between 56.73 and 57.81. The 52-week range sits between 37.82 and 62.75. RHT hit a high in the beginning of May, fell almost $12 by June and has been trending higher in a volatile fashion. The market cap is 11.01B. The stock is close to its all time high, not counting a 2-1 split pre-millennium.  Tech sector is down almost 1% on the day, with Red Hat’s major competitors all down slightly. 

The ATM 57.5 straddle is currently priced around $6.00.  This is implying a $6.00 move in either direction, or a 10.5% move.  This gives us an upside measure move target near $63.00. The open interest is highest in calls at the 62.5 and 67.5 strike prices. 

Trade: Buy Oct 60-65-70 Call Fly for 0.75

Risk: $0.75

Reward: $4.25

Break Even: 60.75 and 69.25

Strategy: If I get a nice move I will generally take off half and let the rest ride to expiration.

Paper bought 13,081 FRX Jan 2013 41 Calls for $.35 (16.7 times usual volume) when stock was trading $36.20

Paper bought 5650 AVP Nov 18 Calls for $.35 (5.4 times usual volume) when stock was trading $15.84

Paper sold 1571 PKG Oct 35 Puts for $1.20 (5.4 times usual volume) when stock was trading $34.91