Lennar reported better-than-expected fiscal second-quarter profits and sales late Wednesday, delivering more than 1,000 more homes than was predicted as a tightening U.S. housing market shows strong demand for new homes. Lennar stock advanced early Thursday, leading the S&P 500, after faltering Wednesday as the Fed held rates steady.
Analysts expected quarterly profits for the Miami-based luxury homebuilder to nearly halve with revenue also decreasing. However, Lennar reported earnings down by only a third with sales slightly dipping. The company also gave bullish guidance.
Ahead of Q2 earnings, Lennar stock was up more than 24% in 2023.
Meanwhile, the Building-Residential/Commercial industry group ranks No. 6 out of 197 groups tracked by IBD. Homebuilder stocks collectively have advanced more than 30% so far in 2023. KB Home, PulteGroup and Taylor Morrison Home have all shot up more than 50% so far in 2023.
LEN rose around 4.2% to 119.60 Thursday during market trade, hitting new highs. On Wednesday, Lennar stock dropped 1% to 114.75. The stock is up around 7% in June. Fellow homebuilder stocks Toll Brothers and D.R. Horton both recently surged on better-than-expected earnings.
Lennar Stock: Earnings
Estimates: Wall Street expected Lennar EPS to sink 48% to $2.33 with revenue sliding 14% to $7.22 billion. LEN home deliveries were predicted to contract 6% to 15,654 in the second quarter. Analysts forecast full-year profits down 36% to $10.05 per share on a 13% decline in sales, to $29.40 billion.
Results: Lennar earnings fell 33% to $3.01 per share with sales decreasing 4% to $8 billion. Deliveries rose 3% vs. a year earlier to 17,074 homes. New home orders totaled 17,885, up about 1% compared to 2022.
Lennar reported its backlog at the end of Q2 is 20,214 homes, worth roughly $9.5 billion. The company's average sales price per home delivered was $449,000 in the second quarter, compared to almost $500,000 at the peak of last year.
Outlook: Lennar expects to deliver 17,750-18,250 homes in the current fiscal Q3 with gross margins between 23.5% and 24%. For the full year, Lennar forecasts deliveries of between 68,000 and 70,000 homes, up from its prior guidance of 62,000 to 66,000.
"During the quarter we continued to see the housing market normalize and recover from the Fed's 2022 aggressive interest rate hikes in response to elevated inflation," Executive Chair Stuart Miller said in a statement Wednesday.
Miller added that consumers appear to have accepted a "new normal" for interest rates and that demand has accelerated. However, the housing shortage continues to be an issue for customers, according to Miller.
"America needs more housing, particularly affordable workforce housing and demand is strong when price and interest rates are affordable," he said.
LEN earnings decelerated over the past four quarters from a 59% jump in Q2 last year to a 21% decline in Q1. Revenue gains slowed from 30% growth in the second quarter last year to a 5% increase last quarter.
U.S. Housing Market
The U.S. is in a long-term housing shortage, with the construction of new homes failing to keep pace with the growing population. Rising materials costs, supply chain issues and labor shortages since the Covid pandemic have exacerbated the issue.
The U.S. currently faces a shortage of 5.5 million homes, according to the National Association of Realtors. The gap is so large it would take more than a decade to close, NAR says, even if new-home construction accelerates.
However, new home sales improved for the fifth straight month in April, the Commerce Department reported on May 23, the most recent data available. The rise was modest, from a seasonally adjusted annual rate of 656,000 to 686,000. But it was in stark contrast to falling sales rates for existing homes, as homeowners sit tight.
The key determinant of interest rates for mortgages is the federal funds target rate set by the Federal Reserve. This rate determines the overnight lending rate among U.S. banks.
The Fed, attempting to cool rapidly rising inflation, has raised its target rate in each of its past 10 meetings. Higher interest and mortgage rates tend to reduce housing demand, keeping the supply of existing homes low, according to experts.
The Fed decided Wednesday to pause rate hikes, but signaled another two quarter percentage point increases could arrive before the end of 2023. The announcement came just ahead of Lennar's financial release.
The decision left the Fed's key borrowing rate in a range of 5%-5.25%.
Last week, the Mortgage Bankers' Association (MBA) reported applications for home purchases dropped 1.4% in the week ending June 2, slipping for the fourth straight week, to the second lowest point since 1995.
Lennar Stock Gets Price Hikes Ahead Of Earnings
Barclays raised its price target on the homebuilder stock to 135 from 120 on May 24 and has maintained an "Overweight" rating on the shares.
Analyst Matthew Bouley said in a research note investors still fail to appreciate the positive impact that low home inventory will have on new construction, as well as the implications for builders and suppliers. Overall, housing is still under pressure. But new construction is improving and in a "much stronger place," Bouley wrote.
Meanwhile, Deutsche Bank initiated coverage of Lennar stock on May 31, giving LEN shares a "Sell" rating with a 105 target price. That is about 10% below where shares traded on Tuesday. Analyst Joe Ahlersmeyer sees Lennar "fundamentally underperforming" DHI within the homebuilding business over the near, medium and longer term.
Looking at nine homebuilder stocks, Ahlersmeyer wrote investors are questioning whether shares might be "due for a breather" after rallying 40%-80% off late October lows. He added homebuilder stocks could "climb meaningfully higher" this year.
Lennar stock technically remains in a buy range on a rebound from support at its 10-week moving average. The 10% buy zone extends to 120.55. Shares have a 95 Composite Rating out of a possible 99. Lennar stock has a 93 Relative Strength Rating.
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