Large Cap vs Moskowitz Cap(ital) – A Comparison Study – By Moskowitz Capital

Moskowitz Capital Builders are 70% more profitable

We work with many of the most innovative and successful builders in their respective communities. Below we show imperially how profitable Moskowitz Capital builders are as compared to a market leader.

What We Did

We started with Lennar Corporation (NYSE: LEN), who in its 66-year history has grown to be the largest home builder in the US. Having delivered 51,491 homes in 2019, and with annual revenues of $22.3 billion USD, it is ranked 154th on the Fortune 500 list. Then, we took five of our builders, combined their financial statements in order to protect their privacy, and started making comparisons.

What We Found

Our builders are profitable.

In fact, on a gross margin basis, they are 70% more profitable than Lennar. This can largely be attributed to our builder clients being nimbler and more adaptable to local market opportunities. Many of our clients focus on infill projects, and one-off developments, something the big companies are too big to do. Lennar develops large swathes of land, building standardized homes, focusing on volume over margin.

Lennar’s operating costs are low.

Lennar, and its 10,000 employees, have the benefit of economies of scale on the operating side of the business. Operating expenses are just 13% of Lennar’s gross profit, versus 40% of the Moskowitz Capital builder group. Lennar’s back office and administrative costs have the benefit of being spread over significant revenues. However, higher operating costs are also the by-product of the previously mentioned profitable projects. Smaller and more complex infill projects require more of management’s focus and are more challenging to scale. While Lennar has the edge on operating costs, the Moskowitz Capital group had the lead starting with a higher gross profit margin, leaving them the more profitable of the two groups at a 13% net profit margin, versus Lennar’s 11%.

Control the equity to control the business.

Moskowitz Capital builder clients are solely owned by individuals, families or partners and would prefer to keep it that way, both for control and to avoid dilution. Creating equity only from retaining earnings is slower and not as flexible as raising it in the capital markets. Lennar has the advantage of tapping into the capital market when needed, at the cost of existing shareholder dilution. 51% of Lennar’s equity stems from retained earnings, while the balance is paid-in capital. We can see the effect of Lennar’s significant equity, both in the working capital ratio, as well as the debt to equity ratio, both showing Lennar has a strong balance sheet. When raising equity, especially for an individually or family held corporation, the negative dilution impacts must be balanced against the balance sheet gains. Using debt, in place of equity, in these scenarios is often a desirable solution to avoid this dilution. Even with less equity, the Moskowitz Capital group companies are no slouch, sporting a working capital ratio of 1.09 (over one is considered a positive sign) and a debt to equity ratio of 3.82 (under four is considered a positive sign in the construction industry).

What We Conclude

Moskowitz Capital builder clients are a profitable group of companies. They focus on high impact infill and development projects and get rewarded by high profit margins for doing so. Lennar has the luxury of being in business since 1954, giving it time to grow its balance sheet and its economies of scale. Given time, and the continued profitability of the Moskowitz Capital group, they will catch up to Lennar on the operating cost and balance sheet ratios.