Lennar Corporation: A Strong Performer in the Housing Market
Lennar Corporation (NYSE:) has shown resilience in the face of headwinds in 2024, particularly margin pressure. However, this is not all bad news. Despite the tepid housing market conditions, home builders like Lennar are thriving due to favorable business environments, solid cash flow, and strong capital returns. Looking ahead to 2025, there is a promising catalyst on the horizon with the FOMC interest rate cuts.
Lennar’s Q3 Performance and Future Outlook
In Q3, Lennar outperformed expectations with deliveries and backlog showing growth compared to the previous year. The company reported $49.4 billion in net revenue, representing a 7.7% increase year-over-year, exceeding expectations by 260 basis points. This growth was primarily driven by a 16% rise in deliveries, although the average selling price was slightly lower due to mix and incentives. Despite some margin contraction, the company managed to surpass consensus forecasts.
- New home gross margin contracted by 190 basis points, offset by improved SG&A.
- Net margin on home sales contracted by 180 basis points, but net earnings were up 5%.
- GAAP EPS increased by 10% to $4.26, with adjusted EPS remaining strong at $3.90.
Despite normalization in cash flow following intense activity in previous years, Lennar’s cash flow remains robust. The company’s guidance, while falling slightly short of consensus expectations, still hints at favorable cash flow to sustain operations and enhance shareholder value through capital returns.
Building Value for Shareholders
Lennar’s positive cash flow in the quarter allowed the company to build shareholder value through dividends, share repurchases, and balance sheet improvements. Noteworthy highlights include a net cash position, no debt on the revolving facility, and enhanced equity despite doubling treasury shares. With an expected uptrend in equity, Lennar is poised for further growth.
Assuming the anticipated FOMC tailwind begins to influence the market soon, capital returns could see acceleration in 2025. With room for increased dividends and capital returns, Lennar’s outlook for growth in 2025 is promising, particularly given the interest rate environment.
Analysts Sentiment and Future Prospects
While the consensus rating for Lennar is currently at Hold, down from a Moderate Buy, the price target lags behind the price action. However, new reports initiated at Hold have pushed the consensus price target higher. Analyst sentiment is positive, with a 35% increase compared to last year and a 7.5% rise since the Q3 release, driving the stock to new highs.
Technical indicators suggest a potential correction in the near future, with the market trending higher but showing signs of a rising wedge pattern. In the event of a correction, key support levels to watch are $180, $170, and $165. A deeper correction could present a value opportunity if the stock price falls below $165.
Overall, Lennar’s strong performance, positive outlook, and potential for capital returns make it an attractive investment in the housing market.