Lennar (LEN) is facing headwinds in 2024, primarily stemming from margin pressure. However, this is not the worst news. While the overall housing market is tepid, conditions are actually favorable for home builders, driving business, cash flow, and capital returns for companies like Lennar.
The key catalyst for 2025 lies in the expected Federal Open Market Committee (FOMC) rate cuts. High interest rates and affordability issues are currently impacting consumer demand, but this headwind is expected to transform into a tailwind as rate cuts take effect. Lennar CEO Stuart Miller believes that the market will strengthen over time as affordability improves.
Lennar delivered a strong performance in the third quarter, with deliveries and backlog exceeding the previous year’s levels. Net revenue reached $49.4 billion, representing a 7.7% increase year-over-year, surpassing expectations. This growth was driven by a 16% increase in deliveries, although slightly lower average selling prices, influenced by mix and incentives, impacted the overall gain.
While the margin contracted compared to last year, it was less than the consensus forecast. The new home gross margin contracted by 190 basis points, offset by improved SG&A. Net earnings rose 5% and exceeded the consensus, with GAAP EPS reaching $4.26, up 10%, including mark-to-market impact and other one-offs. The adjusted EPS remained strong at $3.90, flat year-over-year, and $0.33, nearly 1000 basis points above the average forecast.
Despite normalization following two years of intense activity, cash flow remains robust. Guidance, although falling short of consensus forecasts, implies sequential improvement in deliveries and flat margins compared to Q3. This indicates sufficient cash flow to maintain strong operations and continue value-enhancing capital returns.
Lennar’s Q3 capital return included $519 million in share repurchases, in addition to dividend payments, which helped reduce the average share count by 4.5% year-over-year. The company’s commitment to shareholder value is evident in its positive cash flow, dividend payments, share repurchases, and improved balance sheet health. The balance sheet boasts a net cash position, no debt on the revolving facility, and improved equity, despite more than doubling treasury shares. Equity is up 3.15% and is expected to continue growing.
With the anticipated FOMC tailwind, capital returns could accelerate in 2025. The dividend payment is less than 5% of earnings, and the total capital return for the quarter is less than 50%, leaving ample room for increases without earnings growth. The consensus for 2025 predicts greater than 15% growth, likely a conservative estimate given the outlook for interest rates.
Analyst sentiment towards Lennar is positive, though the consensus price target and rating may be a bit misleading. The rating is currently pegged at Hold, down from a Moderate Buy, but this is primarily due to new reports initiated at Hold, with price targets that are leading the consensus higher. The consensus is up 35% compared to last year and 7.5% since the Q3 release, pushing the market to the high-end range and a new all-time high.
With 75% of fresh revisions ranging from $190 to $235, reaching a new high seems likely; the question is when. Technical action suggests a market trending higher and winding up for its next move. However, recent action resembles a rising wedge, which could indicate a correction is imminent. Given the 200% increase in the last two years and record trading levels, a correction may be on the horizon. In that scenario, potential support and rebound levels are $180, $170, and $165. A move below $165 could lead to $140, presenting a deep-value opportunity.
