We like the outlook for homebuilders. The combination of short supply, cheap financing, and a year of pent-up demand has us excited about the prospects of Lennar (LEN.B) despite some signs of trouble, says Rich Moroney, editor of Dow Theory Forecasts.
Yes, interest rates have risen. But mortgages remain much cheaper than historical norms, and rates could likely increase somewhat without triggering a decline in home demand.
Yes, home prices have risen, with the median new U.S. home topping $349,000 in February, up from $326,000 six months ago.
But while today’s higher prices keep some buyers out of the market, that price trend reflects robust demand. Plus, the need for low- and mid-priced housing should help keep Lennar busy. Most of the company's houses (68%) fall in the step-up category, but 28% are entry-level.
Yes, the shares seem more expensive after their 25% rally this year. But Lennar still earns a Quadrix® Value score of 92 (out of 100) and trades at nine times trailing earnings, 16% below its three-year norm.
In the February quarter, Lennar delivered 12,314 homes, up 19%, while accepting orders for 15,570, up 26%, with a dollar value of $6.5 billion, up 31%.
Executive Chairman Stuart Miller said, “A combination of still low interest rates, strong personal savings rates during the pandemic, strong stimulus from the government, and solid household formation continue to drive demand, while the housing shortage driven by 10 years of production shortfall defines a constrained supply.”
Such insistent demand bolsters our faith in Lennar’s ability to exceed consensus targets, which call for sales growth of 21% and per-share-profit growth of 41% this year and sales growth of 6% and profit growth of 2% next year.
The company targets delivery of 62,000 to 64,000 homes with an average price of $400,000 in the current fiscal year, which ends in November, up from 52,925 and $394,000 in fiscal 2020.
Homebuilding accounted for 93% of Lennar’s revenue and 86% of its operating profit last year, while its financing business generated 4% of revenue and 14% of profits.
On March 17, the company announced plans to spin off all or part of its noncore businesses to focus on homebuilding and financial-services operations. The shares jumped on the news.
Lennar has been able to more than offset higher costs with higher prices — net margins on home sales reached 16.6% in the quarter, up from 11.4% a year ago. Companywide, operating profit margins widened to a record 15.7% in the 12 months ended February, up from 11.7% a year earlier. Lennar projects roughly flat margins over the next year.
Some investors fear that Lennar can’t keep its margins high going forward, but we’re willing to give management some credit for past success. The stock is a rated a "Long-Term Buy", which means it ranks among out top choices for 24 to 48 month gains.