Lennar LEN faces headwinds in 2024, including margin pressure, but that’s the worst news. While the overall housing market is depressed, conditions are favorable for home builders, driving business, cash flow and capital returns. Looking ahead, the FOMC interest rate cut in 2025 will likely be the trigger.
High interest rates and affordability are currently impacting consumer demand, but headwinds are expected to become tailwinds as the rate cut process progresses. To paraphrase comments from Lennar CEO Stuart Miller, the market is only expected to strengthen over time as affordability improves.
Renner had a great performance in the third quarter. overwhelmed by the instructions
Lennar had a strong third quarter, with deliveries and backlog increasing compared to a year ago. The company reported net sales of $49.4 billion, up 7.7% year over year, beating expectations by 260 basis points. The gain was driven by a 16% increase in deliveries, offset by “slightly” lower average selling prices due to mix and incentives. Mix and incentives also impacted margins, which contracted compared to the prior year but narrowed more than the consensus forecast reported by MarketBeat.
New home gross margin contracted 190 basis points, offset by improved SG&A expenses. Net profit margin on home sales contracted by 180 basis points, and net income increased by 5%, beating consensus. GAAP EPS of $4.26 was up 10%, including mark-to-market impacts and other one-time factors, but adjusted EPS was still flat year-over-year at $3.90, or $0.33 above expected average. It’s nearly 1000 basis points higher. Importantly, cash flow remains strong despite normalizing after two years of intense activity, and guidance remains positive despite being below consensus estimates.
Although the company’s guidance is underwhelming compared to consensus estimates, we expect delivery times to continue to improve and margins to be flat compared to the third quarter. Although slower than expected, guidance suggests sufficient cash flow to maintain fortress-quality operations and value-enhancing capital returns. Third quarter capital gains included $519 million in share repurchases, not including dividends, which contributed to a 4.5% year-over-year reduction in average counts.
Building Lennar shareholder value
Lennar had positive cash flow in the quarter, which allowed it to increase shareholder value while paying dividends, repurchasing stock, and improving the health of its balance sheet. Balance sheet highlights include a net cash position, no debt from a revolving facility, and improving equity despite more than doubling its own equity. The stock has increased by 3.15% and is expected to continue growing.
Capital returns could easily accelerate in 2025, assuming the FOMC tailwinds start impacting the market soon. Dividend payments are less than 5% of profits and total capital return for the quarter is less than 50%, leaving plenty of room for growth unless profits grow. The consensus for 2025 is for growth above 15%, which could be a conservative estimate given the outlook for interest rates.
Analyst sentiment lifts Lennar
Lennar’s consensus price sentiment and price target are a bit misleading. The rating has been lowered from “moderate buy” to “hold,” and the price target is lagging behind the price movement. However, the influx of new reports that started at Hold caused the rating to decline and the price target to raise the consensus. Consensus is up 35% compared to last year and 7.5% since its release in Q3, taking the market into the high-end range and hitting new all-time highs. 75% of the new revisions are in the $190-$235 range, so new highs could be reached. The question is when?
The technical movement is suggestive as the market is trending up and closing for the next move. Of note, the recent movement looks like an ascending wedge, which could suggest a correction is near. Up 200% over the past two years and trading at record levels, the market is ripe for a correction. In this scenario, the support and rebound targets would be $180, $170, and $165. If it falls below $165, it could reach $140 and present a great value opportunity.
The article “Why Lennar stock could be the best stock in the housing market” first appeared on MarketBeat.
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