Lennar is currently trading at $88.73 per share and has a Graham number of $163.69, which implies that it is -45.8% below its fair value. We calculate the Graham number as follows:
√(22.5 * earnings per share * book value per share) = √(22.5 * 15.09 * 1.1) = 163.69
The Graham number is one of eight factors that Graham enumerates in Chapter 14 of The Intelligent Investor for determining whether a stock is defensive or not. Rather than use the Graham number by itself, its best to consider it alongside the following:
Sales Revenue Should Be No Less Than $100 million.
For Lennar, average sales revenue over the last few years has been $23,112,680,500.00, so according to the analysis the stock has impressive sales revenue.
Current Assets Should Be at Least Twice Current Liabilities.
We calculate Lennar's current ratio by dividing its total current assets of $25,102,861,000.00 by its total current liabilities of $4,031,160,000.00. Current assets refer to company assets that can be converted into cash within one year, such as accounts receivable, inventory, and liquid financial instruments. Current liabilities, on the other hand, refer to those that will come due within one year. In Lennar’s case, current assets outweigh current liabilities by a factor of 6.2.
The Company’s Long-term Debt Should Not Exceed its Net Current Assets
This means that its ratio of debt to net current assets should be 1 or less. Since Lennar’s debt ratio is 0.2, the company has healthy debt levels. We calculate Lennar’s debt to net current assets ratio by dividing its total long term of debt of $3,934,059,000.00 by its current assets minus total current liabilities.
The Stock Should Have a Positive Level of Retained Earnings Over Several Years.
Lennar had positive retained earnings from 2009 to 2021, during which time they averaged $4,106,342,000.00. Retained earnings are the sum of the current and previous reporting periods' net asset amounts. It's a similar metric to free cash flow, with the difference that retained earnings are accounted for on an accrual basis.
There Should Be a Record of Uninterrupted Dividend Payments Over the Last 20 Years.
Lennar has returned an average dividend yield of 0.7% over the last five years, and has offered dividends to its equity investors since at least 2011.
The Company Should Have a Minimum Increase of at Least One-third in Eps Over the Past 10 Years.
We are going to compare Lennar's earnings per share averages from the two 'bookends' of the 13 period for which we have data. The first bookend comprises the years 2008, 2009, and 2010, whose Eps values of $-7.01, $-2.45, and $0.51 average out to $-3.00. Next we look at the years $5.74, $7.85, and $14.27, which average out to $9.00. The growth rate between the two periods easily satisfies Graham's standard since it is 400%.
Based on the above analysis, we can conclude that Lennar meets most of Benjamin Graham's criteria for an undervalued stock because it is trading far below its fair value and has:
- impressive sales revenue
- an excellent current ratio
- healthy debt levels
- an excellent current ratio
- positive retained earnings from 2009 to 2021
- a solid record of dividends
- growing earnings per share
