Warren Buffett-backed Lennar reports fiscal third-quarter earnings and revenue Thursday. Analysts predict quarterly profit for the luxury homebuilder will sink 30%, but maintain that the new-home housing market will remain hot. LEN stock edged up Thursday.
Homebuilders are at a critical juncture. The stocks rallied aggressively through the first half of the year, as rising interest rates slowed sales of existing houses, driving up demand and prices for newly built homes. The Building-Residential/Commercial industry group ranks a lofty No. 14 out of 197 groups tracked by IBD. Homebuilder stocks collectively have advanced more than 36% so far in 2023.
During that run-up, Warren Buffett's Berkshire Hathaway bet on the U.S. housing market. Berkshire reported last month that, during Q2, it opened new positions in Lennar, D.R. Horton and NVR worth a total of more than $800 million.
But the run-up in homebuilding stocks has now been paused for almost nine weeks. That has left some, like Toll Brothers, NVR and M/I Homes in viable base patterns.
From here, the rally could resume and stocks could move higher. But heavy price incentives and other perks used to lure homebuyers into new homes could begin to take a toll, sending homebuilder earnings and stocks south. Lennar's results Thursday will update that picture.
Lennar stock advanced 1.5% to 117.71 Thursday during market trade. On Wednesday, shares edged down 0.5% to 115.97. The Warren Buffett stock is down 2.6% in September. Ahead of Q3 earnings, LEN has gained 26% in 2023.
Fellow homebuilder stock Toll Brothers reported better-than expected fiscal third-quarter earnings and revenue in late August, buoyed by increased home deliveries and surging unit prices. The luxury homebuilder also forecast new home prices will continue to soar through the end of the year
U.S. Housing Market
The big picture in the U.S. is that of a long-term housing shortage. The construction of new homes has not kept pace with the growing population. Rising material costs, supply-chain issues and labor shortages since the Covid pandemic have exacerbated the issue.
The shortage is currently running at a deficit of about 5.5 million homes, according to the National Association of Realtors (NAR). The gap is so large it would take more than a decade to close, NAR says, even if new-home construction accelerates.
That points to a bullish long-term view for homebuilders. Warren Buffett backed that view with Berkshire's Q2 bets on the U.S. housing market.
The National Association of Realtors on Aug. 22 reported existing-home sales fell 2.2% in July, down nearly 17% vs. 2022, to a seasonally adjusted annual rate of 4.07 million. Meanwhile, the median existing-home sales price rose 1.9% from a year ago to $406,700.
In July, new-home sales grew following a drop in June, according to Commerce Department data. Sales of new single‐family houses in July were at a seasonally adjusted annual rate of 714,000, up 4.4% compared to June and an increase of 31.5% vs. July 2022.
Prices remained strong and demand steady as high mortgage rates left owners of existing homes holding tight — not wanting to sell and move up into more expensive mortgages. 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 repeatedly raised its target interest rates since the beginning of 2022. Higher interest and mortgage rates tend to reduce housing demand, which theoretically should help dampen inflation. Higher interest rates also help keep the supply of existing homes low.
Warren Buffett: Lennar Earnings
Estimates: Wall Street sees Lennar earnings falling 30% to $3.52 per share and revenue declining 5% to $8.49 billion. Analysts forecast Lennar delivered 18,192 homes during the quarter.
Results: Check late Thursday.
LEN earnings decelerated in recent quarters from a 59% jump in Q2 last year to a 33% decline in Q2. Revenue gains slowed from 30% growth in the second quarter last year to a 4% decrease in Q2 2023.
The average sales price of Lennar homes sold during the quarter, a key metric, was $449,000, down from $483,000 a year earlier. The company said the decrease was due to pricing to market, and product mix.
On Monday, Citi analyst Anthony Pettinari lowered the firm's price target on the Warren Buffett stock to 139, down from 148. Pettinari maintained a buy rating on Lennar stock as he remains "selectively positive" on U.S. homebuilders, citing "historically attractive" valuations, low inventories and secular share gain tailwinds.
In June, Lennar reported better-than-expected second-quarter profit and sales as a tightening U.S. housing market showed strong demand for new homes.
Lennar reported its backlog at the end of Q2 was 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.
At the time, Lennar forecast 17,750-18,250 home deliveries in Q3 with gross margins between 23.5% and 24%. For the full year, Lennar forecast deliveries of between 68,000 and 70,000 homes, up from its prior guidance of 62,000 to 66,000.
Lennar stock has an 86 Composite Rating out of 99. The Warren Buffett stock also has a 90 Relative Strength Rating. The EPS Rating is 72.
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