- Lennar moved higher on solid results but don't chase this stock higher.
- A looming cliff is approaching the home building sector.
- Revenue is up this quarter but the decline will begin in Q2.
- 5 stocks we like better than Lennar
Lennar NYSE: LEN raised the roof with Q1 results, but investors are urged not to chase this market higher. The results, while good, confirm news from other homebuilders that suggest a looming cliff is fast approaching the sector. While new orders are still outpacing deliveries, the number of new orders is declining, the cancellation rate is double the previous year, and backlogs are falling. Backlogs will sustain business growth for the next quarter or two; if conditions worsen, the growth outlook will quickly evaporate, and falling home prices aren’t helping.
Lennar reports average selling price is down about 2% for the quarter and 8% on a forward-looking basis. This is cutting into the margin, hurting earnings, and is a factor that could cap gains very quickly.
And the analysts aren’t helping the situation. Marketbeat.com’s analyst's tracking tools haven’t picked up any new commentaries yet, but the price target and sentiment trend are downward. The analysts still have the stock pegged at a firm Hold, but this is down from last year’s Buy with a price target that assumes the stock is fairly valued at current levels.
The latest activity has the price target firmed, but this is likely a near-term phenomenon that will soon revert to the trend. The homebuilders aren’t bad stocks, just low-yielding dividend payers with a sketchy outlook for growth.
Lennar Rises On Mixed Quarter
Lennar had a better-than-expected quarter, but this is relative to the analyst's expectations and not prior results. The revenue of $6.49 billion is up 4.7% from last year and beat by $0.5 billion, but price reductions and inventory-clearing activity drive sales. The company reports a 9% increase in deliveries offset by a decline in the selling price, which is expected to accelerate over the year. The price reduction led to a decline in the margin, which is also expected to accelerate, but there is some good news here.
The gross margin fell by 570 basis points for a net decline of 560 bps which was less than expected. This left the adjusted earnings at $2.12 and $0.57 better than expected but more than 20% lower than last year. It is good news but not a catalyst to sustain higher share prices.
The guidance calls for sequential growth throughout the year, but results will be weaker than last year. The company’s delivery guidance is -0.6% lower than last year at the top end of the range, coupled with an expectation for lower prices. The Q2 average selling price is expected to be $435,000 to $445,000, 66 bps lower than Q1 at the high end. Assuming the best, revenue will begin contracting by low single-digits in Q2, and the contraction will accelerate into the end of the year.
Lennar Capital Returns Are Safe … For Now
Lennar doesn’t pay a robust dividend, the yield is about 1.5% at current share prices, and it has been lifted in recent years due to windfall profits in the sector. The payout ratio is only 8.5% of earnings, so it looks relatively safe, but there is a risk of a cut. The FY EPS consensus target is sufficient to sustain the payout, but it is down about 50% from the previous year, and the outlook for earnings isn’t all that firm.
The chart isn’t all that favorable, either. The stock has pulled back from an all-time high once this year already, and that level is a target for strong resistance. The market is up in pre-opening action, but the upside potential is limited, with more resistance targets than one. The closest hurdle is $104, which may be tough to cross. The institutions turned bearish in Q4 2022, and the activity quarter-to-date aligns with that trend.
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