Lennar Stock Forecast

Lennar Stock Forecast: Lennar Corporation [NYSE: LEN] is a US-based home construction and real estate company. One of the nation’s leading homebuilders, Lennar is principally involved in designing, building, and selling all types of residential homes for first-time, move-up, luxury, urban and active adult buyers.

The company builds single-family attached and detached homes and multi-family rental properties in more than 20 states and more than 44 markets across the nation under different brand names, including Lennar and CalAtlantic Group.

Lennar Corporation also buys and sells residential land. The company also provides mortgage financing, title insurance, commercial real estate, investment management, and other financial services.

The company’s segments include:

• Homebuilding East,
• Homebuilding Central,
• Homebuilding Texas,
• Homebuilding West,
• Financial Services, and
• Multifamily.

The company delivered about 53,000 homes in 2020 at an average price of around $400,000 each.  Lennar Corporation was founded in 1954 and is based in Miami, Florida. The name Lennar is a combination of the first names of two of the company’s founders, Leonard Miller and Arnold Rosen.

The Bull Case For Lennar

Lennar Corporation, one of the largest homebuilding companies in the United States, is all set for a bumper 2021 and 2022, thanks to the backlog of demand, restricted supply and rising home prices.

The company acknowledged the same in its latest earning reports, claiming that “the underproduction of homes for the past ten years has created a housing shortage that, combined with strong demand, has pushed home prices higher.

Demand is growing as the millennial generation has begun moving towards traditional family formation trends.

Concurrently, the proposition of home as more of an essential part of the way we live, not just a place to live, is becoming a way of life rather than a COVID-driven reaction.”

Management’s thoughts are attested by data from Norada Real Estate Investments, which reveals that a total of 5.64 million homes were sold in 2020, up 5.6% from 2019, reaching the highest level in 13 years and the most since before the Great Recession.

Average housing prices jumped 8.4% from a year ago. A very interesting thing to note here is that millennials constituted the largest segment, accounting for approximately 38% of new homebuyers. They are all buying their first houses and, unlike in the past, they are opting for higher-priced houses.

Experts believe that the pent-up demand for new homes, along with supply-side restrain, could serve as a growth catalyst for homebuilders like Lennar. Combine these factors with historically low interest rates, and then it is easy to comprehend why so many are bullish about the housing boom to work through 2021 and 2022.

Lennar currently has a backlog of 18,821 contracts valued at $7.81 billion, up 24% in value in comparison to the last five years.

Lennar reported $2.04 earnings per share for Q1 2021 on a revenue of $5.30 billion, against the consensus estimate of EPS of $1.71 and revenue of $5.21 billion. The construction company’s quarterly revenue was up 17.7% compared to the same quarter last year.

Lennar reported revenues of $21.59 billion for 2020, a jump of over 10% in comparison to 2019. Lennar has averaged 22% revenue growth over the last ten years. The company made deliveries of 12,314 homes, an upswing of 19%, while it got new orders of 15,570 homes, up 26%.

Lennar continues to expect growth in pricing and deliver between 62,000 and 64,000 homes for the year. The Miami-based homebuilder sold 52,925 homes in 2020 and 51,491 in 2019.

The company, for 2021, expects revenue growth of 15% to 20%, based on increasing housing prices, strong demand for new homes, and a desire to move to rural settings in view of the pandemic.

Analysts estimate revenues of $26.21 billion for 2021 and $28.52 billion in 2022, growth of 16.54% and 7.78%, respectively. Also, the increase in new home prices is set to offset the additional cost incurred due to rising lumber prices and labor costs.

Going forward, the increases in both, backlog and growing demand for new homes, is expected to boost Lennar’s revenue in the next couple of years. Higher demand coupled with short supply drives up prices which, in turn, bodes well for homebuilders like Lennar.

Investor Takeaway

Lennar is one of the big three operators in the US in the homebuilding sector, along with PulteGroup (PHM) and D.R. Horton (DHI). Lennar is ready to have a great 2021 and 2022, as the company is expected to reap a windfall from historic low interest rates, increasing demand from millennials for a first-time new home, and rising home prices.

The company currently operates at historical operating margins of 14.53%, and expects 15% to 20% revenue growth in 2021. Lennar, though, may witness its margins pressurized as tax rates may be augmented by the Biden administration.

All in all, Lennar is a good and stable company, which is all set to leverage the strength currently being witnessed in the housing sector. To add to that, the company is selling for less than fair value, which should make it more tempting for investors.   

The Bear Case For Lennar

Lennar has been having a bumper run recently and the momentum is expected to continue at least till the next year. Despite some good things going for it on the near horizon, it is important to note that no modern organization is completely devoid of risk.

The widest list of risks to which the company is most exposed to within the homebuilding sector are as following:

The first risk is inflation. Continuing cost increases in materials or labor could affect the company’s operating margins.

Lumber costs are all set to increase. More importantly, there’s shortage of skilled labor to meet the demand for new homes. Skilled workforce is in short supply, which means the company has to incur extra expenditure to entice and retain skilled workers.

Also, Lennar’s margins may be adversely affected by a variety of macroeconomic factors beyond its control.  Increased corporate taxes is the most worrisome thing for the company. 

The company expects a higher tax rate going into 2021 compared to 2020. President Biden has made his intentions abundantly clear about raising corporate tax rates to help fund the infrastructure improvement goals estimated to cost $2.3 trillion.

The current rate of corporate tax stands at 21 percent and Biden is vying to raise it to 27 percent. It is a forgone conclusion that the tax rate will put more pressure on Lennar’s operating margin.

The third risk is the decline in demand for new homes after 2022. The current shortage will not last forever as more homes are built and sold. The demand will be met, leading to reduced number of home sales. All of which should drive down revenues and extend the time it will take the company to recover land purchase and property development costs.

Also, Lennar’s financial condition may be adversely affected by the COVID-19 pandemic and a downturn in the homebuilding market. All these risks need to be accounted for as they can significantly reduce the price of Lennar shares.

Lennar Stock Price Forecast

Analysts 12-month price forecasts for Lennar’s stock range from a high estimate of $120 to a low estimate of $97.00.

On average, they expect Lennar’s share price to reach $110 in the next year. This suggests that the stock has a possible upside of 6.7%.

Is Lennar Stock a Buy?

The housing market is definitely hot, and Lennar’s management has been echoing the same view for the past several quarters. Lennar is one of the top homebuilders in the US and the largest one by revenue. The company looks bullish on its prospects because of record low interest rates as well as the mismatch between the demand and supply for new homes.

Lennar, in its latest quarterly results, came up with numbers that show the company is really on strong footing. Revenue for the first quarter of 2021 soared 18%, while earnings jumped 60%. New orders were up 26% and the backlog reflects plenty of activity to keep the company busy well into 2021.

The company will continue to ride the coattails of the strength being witnessed in the housing market. Market conditions are likely to keep the interest rates at historically low levels for at least some time.

Then there’s shortage of homes. Combine these two factors with strong personal savings and you’ve got the connotation that’s driving housing demand around the country.

All of this put together is really good news for Lennar and other homebuilders. However, Lennar stands to benefit more from the current boom in the housing market because of its size, scale, position in the market, and presence around the country.

Moreover, the housing market is getting extraordinary support from record low levels on interest rates. Mortgages are near 3%, and some see it further sliding south from here. Low rates mean people feel more comfortable taking a loan from the bank to purchase their new home.

Also, while the economy has been ravaged by the pandemic, it is not all a doom and gloom scenario for homebuilders. For those who can afford single-family homes, purchasing a house makes sense from a safety point of view, as it can be a more effective way to maintain social distancing than living in an apartment or condominium complexes.

On the other hand, economic recovery post the pandemic also bodes well for Lennar as it could stoke new confidence and lead to greater home-buying activity.

Lennar has gained 39% since the start of the year, and the homebuilder enjoys a great track record of positive earnings surprises. In its first quarter earnings report for 2021, the Miami-based construction company reported EPS of $2.04 versus consensus estimate of $1.65 while it beat the consensus revenue estimate by 4.92%.

For the current fiscal year, Lennar is expected to post earnings of $10.98 per share on $26.51 billion in revenues. This represents a surge of close to 40% change in EPS, and around 18% jump in revenues. The next year is expected to be even with the company expected to earn $10.99 per share on $28.35 billion in revenues.

All in all, Lennar is expected to enjoy strong growth in the next couple of years. Lennar executive chairman Stuart Miller noted that after a “housing shortage driven by 10 years of production shortfall, the housing market remains very strong across the country.”

The management expects to deliver between 62,000 and 64,000 new homes in the current year. It also expects to earn a 25% gross profit margin on their $400,000 average selling price. What it means is that for every house the company sells, it is going to pocket a cool $100,000 as gross profit.

Even after a stellar run in 2020, Lennar’s stock is still undervalued given its improving bottom line and forward potential. Long-term investors can add Lennar to their portfolio at this lucrative price, and reap rich dividends by holding them for a multi-year period.

Lennar Stock Forecast Conclusion

Lennar Corporation operates in around 20 states, but its operations are majorly concentrated in Texas and the West Coast region. It is to be noted that these are the regions witnessing the most rapid demand for new homes, thus significantly benefitting homebuilders like Lennar.

American families have fortified savings as the advent of the pandemic led to postponement of vacations and recreational activities, while stimulus money from the government plugged in the remaining gaps. The money, thus, saved is being channelized towards buying homes.

Miami-based Lennar is the largest homebuilder in the United States by home sale revenues and net earnings. Lennar derives majority of its revenue (around 93%) from homebuilding, though it also operates in segments as “Financial Services” (3.95%), “Multifamily” (2.56%), and “Other” (0.49%).

Lennar had a really nice 2020, and the home construction giant is all set to carry the momentum in the current as well as the next year, riding on low mortgage rates and strong housing demand.  Lennar currently appears to be one of the most attractive stocks in the home construction sector, as the company looks extremely well-positioned to benefit from a robust order book and extremely promising residential home-buying trends.

And, moving onto 2021, revenue for the first quarter of 2021 soared 18%, while earnings jumped 60%, characterized by strong housing demand. 

At the same time, the company has also remained focused on improving its operating efficiency, driving its selling, general, and administrative (SG&A) spend down to a first-quarter all-time low of 8.4% versus 9.2% last year, as it improves its technology efficiencies.

Moving forward, the company expects Q2 new orders to be in the range of 16,500 to 16,700 homes, and Q2 deliveries to be in the range of 14,200 to 14,400 homes. The company expects Q2 average sales price to be around $405,000, and gross margin at about 25% for Q2, despite rising material and labor costs. Lennar expects Q2 SG&A to be in the range of 7.9% to 8%, as it continues to focus on benefiting from technology efficiencies.

The Florida homebuilder is also laying the groundwork to develop thousands of branded single-family rental communities intended for people who want suburban homes but aren’t ready to make a down payment. 

Lennar Corp is seeking to raise $2 billion for the initiative, which is likely to put Lennar among the largest landlords in the industry. The move comes amidst historically low interest rates as well as low inventory of homes, two factors which have pushed up prices, creating a hurdle for Americans who want properties with more space for remote learning and offices. 

Additionally, Lennar announced it is partnering with Centerbridge, Allianz Real Estate, “and other high quality institutional investors” to create a new “Upward America Venture” that will buy single-family homes and then rent them out.

Wrapping it up 

Lennar is riding an unusual housing boom, built on the lowest mortgage rates in history and buyers rushing to the suburbs in search of bigger suburban homes with space for offices and home-schooling.  Also, demand for new homes is getting a boost from millennials who are just beginning to start their families. While low mortgage rates generally make homes more affordable, home prices are continuing to increase as there are more prospective buyers than there are homes for sale.

Irrespective of all these positive factors, investors are often found to be skeptical regarding the home building industry, and this is the reason Lennar’s shares are trading at only eight times projected 2021 earnings (a price-to-earnings ratio that’s in line with many of its rivals).

Even despite Lennar’s shares jumping over 33% this year, the stock is still undervalued, especially if we take into account its increasingly efficient returns from its capital base and forward potential.  It is, as such, a good time for patient investors, to take advantage of the stock’s low price to add it to their portfolio with the expectation of long-term fundamental growth. 

Given the solid financial condition of the company, and its plan to expand demand by lowering house prices, there’s all probability Lennar will be able to significantly boost its revenue and market share in the coming years.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.