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APRIL 3, 2006 
Horton And Lennar More than one way to build a home
It's easy to understand why investors stash Horton and Lennar into the same mental filing cabinet. They're both big builders that specialize in starter and first-step-up homes in the Sunbelt, with selling prices averaging about $300,000. By coincidence, even their revenues last fiscal year were twinned: around $14 billion for each, with Lennar edging out Horton. Fearing a housing slump, the market gives them roughly equal price-earnings ratios: around seven times last year's earnings. Only one sector of the Standard & Poor's 500-stock index has a lower trailing p-e: auto makers. Growth Ethic Despite their similarities, the differences between Horton and Lennar are telling. Horton, already No.1 in homes sold, is aiming for close to 15% annual unit growth. The ethic is bred in the bone at Horton, which has had rising revenues and profits every quarter since it was founded by Chairman Donald Ray Horton in 1978. Donald J. Tomnitz, Horton's CEO, says he's expecting lots of demand from baby boomers, immigrants, and "echo boomers." But even if that demand doesn't materialize, the company aims to grow by grabbing business with aggressive incentives or, as a last resort, price cuts, says analyst Ivy L. Zelman of Credit Suisse Group (CSR ). Says Zelman: "Horton is being accused by other builders of spiraling down the market." Horton responds that growth won't come at the cost of profitability. In addition to being growth-hungry, Horton is decentralized. Each of its 77 markets in 26 states is run by a profit-center manager, who decides what to build and where. And crucially for a softer market, it's also probably the lowest-cost producer of entry-level houses, thanks in part to putting the screws to its suppliers, says analyst James F. Wilson of JMP Securities LLC. Lennar has a more button-down, centralized style. Although it's forecasting 13% unit growth this year, it stresses return on capital over steady growth. In a unique strategy to prevent its homebuilding units from overbuying land to feed construction growth, it has put land acquisition into a separate division that's rewarded for keeping costs low. It reduces capital needs by bringing in joint-venture partners, as it is doing in a huge project planned for the former El Toro Marine Corps Air Station in Irvine, Calif. And its balance sheet is among the cleanest in the industry, with nearly $1 billion in cash and non-financial-services debt at 33% of capital. That's plenty of money for vulture acquisitions in a softening market. A final difference comes in quality: Lennar, along with last year's BW50 member Pulte Homes Inc. (PHM ), scores highly in the annual J.D. Power & Associates (MHP ) New-Home Builder Customer Satisfaction Study. Horton has fared poorly, although Tomnitz says its market success proves customers are happy. Differences in strategy don't seem to matter much to many investors, who have tarred all builders as risky propositions. That frustrates both of the BW50 homebuilders. Horton executives argue that their track record of steady growth will be unbroken. "Some people accuse us of being cocky, which, if you know us, we're not. We're very conservative people," says Tomnitz. As for Lennar, its executives concede that the market is softening but see opportunities. Says Chief Financial Officer Bruce E. Gross: "If there's a slowdown, there is a unique opportunity to consolidate the industry." Adds Zelman: "The jury's out on which will prove to be the right formula." Take your pick.  By Peter Coy
BW MALL
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