Lennar Stock Remains a Buy Despite Gross Margin Concerns

Lennar (LEN) stock is trading notably lower Friday even after the homebuilder beat top- and bottom-line expectations for its fiscal third quarter.

In the three months ended August 31, Lennar's revenue increased 7.9% year-over-year to $9.4 billion, driven in part by a 16% jump in deliveries to 21,516 homes. Meanwhile, the average sale price of homes delivered fell by 5.8% to $422,000. 

Lennar also said earnings per share were up 10% over the year-ago period to $4.26.

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"We are pleased to report another solid quarter backed by an economic environment that remains very constructive for homebuilders," said Lennar CEO Stuart Miller in a statement. "Employment was strong, housing supply remained chronically short due to production deficits of over a decade, and demand was solid, driven by strong household formation."

The executive adds that while affordability continued to be tested over the three-month period, "purchasers remained responsive to increased sales incentives, resulting in a 16% increase in our deliveries and a 5% increase in our new orders year over year." 

Lennar's top- and bottom-line results came in ahead of analysts' expectations. Wall Street was anticipating revenue of $9.2 billion and earnings of $3.63 per share, according to CNBC.

For the fourth quarter of its current fiscal year, Lennar said it anticipates new orders in the range of 19,000 to 19,300 homes and home deliveries in the range of 22,500 to 23,000, which is in-line with analysts' expectations, according to Barron's. However, the company said it expects its gross margin on home sales to be flat from the third quarter at 22.5%, which came in below expectations of 24.4%.

"We continue to remain enthusiastic about our current execution and our future," Miller said. "We will continue to fortify our balance sheet with significant liquidity and operate from a position of strength, thus enabling us to continue to execute on our core strategies to drive strong cash flow and higher returns."

Is Lennar stock a buy, sell or hold?

Lennar has outperformed the broader market on the price charts so far in 2024, up 30% on a total return basis (price change plus dividends) vs the S&P 500's 21% gain. And Wall Street remains upbeat toward the consumer discretionary stock. 

According to S&P Global Market Intelligence, the consensus recommendation among the analysts following the stock that it tracks is a Buy.

However, analysts' price targets have struggled to keep up with LEN’s run higher in 2024. Currently, the average analyst price target of $183.47 is right around where the stock is trading today.

Financial services firm UBS Global Research is one of those with a Buy rating on the large-cap stock, along with an above-average price target of $195.

"Despite the mixed quarter and outlook, we believe the setup for LEN and the homebuilders remains decidedly favorable, particularly as interest rates trend lower," says UBS Global Research analyst John Lovallo. "Management characterized current home buying activity as strong, with the expectation for even greater and more broad-based strength as rates move lower, which is consistent with our view."

The analyst adds that it's encouraging that the company's third-quarter stock buybacks, which totaled $519 million, puts Lennar on pace to repurchase at least $2 billion in shares this fiscal year.

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