Lennar: Building Value
08/01/2016 7:00 am EST
We are initiating coverage of the nation’s second-largest builder of homes based on volume, with a buy rating, notes analyst Stephen Biggar of Argus Research, an industry-leading independent research firm.
Lennar (LEN) offers affordable, move-up and retirement homes, provides mortgage financing, title insurance and closing services, and is also active in several other areas of real estate.
Although sales of new homes are on track to grow for the fifth straight year in 2016, we believe that the market is still in the middle stages of its upcycle given the severity of the preceding downturn.
In addition, we note that mortgage rates remain buyer-friendly, and do not expect the current cycle to peak until new home sales reach at least 700,000 units, well above the 502,000 new homes sold in 2015.
We think that LEN’s strong geographic presence, and its focused and creative marketing effort, will allow it to post some of the best results in its industry.
In addition to benefiting from the middle stages of an industry upcycle, LEN, in our view, is one of the strongest companies in its peer group.
We think the company is well established in many of the nation’s stronger geographic areas for housing, and also think it is very creative in its offerings.
For example, it sells its homes under the “Everything’s Included” platform, where the company’ s most popular upgrades and features are already included in the purchase price.
In addition, it offers a “NextGen” brand, which have attached apartments on the first floor with a separate private entrance, letting elderly parents or adult children live more independently in the home.
Over the past five years, as the US housing market has recovered from recession, LEN has posted compound annual revenue growth of 25.2%, net income growth of 35.1% and EPS growth of 40.6%.
We are setting a target price of $59, implying a multiple of 13-times our fiscal year 2017 EPS estimate, for a relatively modest PEG ratio of 1.0 based on our 13% five-year EPS growth outlook.
Our target price implies a total potential return, including the dividend, of 27% over the next year.
Stephen Biggar, Analyst at Argus Research