Lennar: 3 reasons to buy the dip in this cash flow machine

Key Points

• Lennar share prices fell following the Q4 release, but this isn't the time to sell out but to think about adding on to a position. 
• Cash flow is robust, fueling a healthy balance sheet, repurchases, dividends and shareholder value. 
• A tailwind is beginning to blow that should keep the homebuilders flush with cash flow and capital through 2024 and beyond. 

Lennar Corporation NYSE: LEN share prices pulled back following the Q4 release, but this is a classic buy-the-dip opportunity. The strong results relative to the consensus figure were not unexpected in light of the recent run-up in share prices. 

The company's stock has increased 50% over the last two months — you can expect some giveback and profit-taking. It's healthy for a strongly trending market to have periodic corrections or buying opportunities. The only question is how deep the pullback will get and when the stock will set new highs.

Lennar delivers results; growth is back in the house

Lennar had a solid quarter despite ongoing pressure from interest rates and affordability. The takeaway from the results is that the homebuilding business has reset, if not the housing market in general. The company's $10.97 billion in revenue is up 7.9% compared to last year and beat consensus by 660 basis points, a significantly wide margin of error, with robust cash flow.

Lennar’s sales included deliveries, up 19%, offset by a decline in the average price. The decline in average price impacts results; earnings might have been higher but had little impact on cash flow. While net home building margin declined by 140 basis points, it was offset by volume gains to deliver $1.5 in adjusted net income, flat YOY. Bottom-line growth was made possible by share repurchases. 

Lennar strengthens its fortress balance sheet

Lennar puts its cash flow to good use. The company improved its cash position to $6.2 billion, has no debt on its revolving credit facility, paid down long-term debt, repurchased shares and paid dividends. The dividend is small at 1% of the earnings outlook but incredibly safe at 10% and compounded by share repurchases. 

Repurchases topped $330 million in the quarter and have the diluted share count down 2.75% compared to last year. Regarding capital and debt, the company is net cash and has reduced its homebuilding debt-to-capital ratio by nearly 500 basis points. Because the outlook for next year is good, Lennar should build on this momentum as the year progresses. 

Lennar grows with a tailwind coming into play

Lennar's results already reveal the impact of falling rates as business picked up towards the end of the quarter as rates began to retreat. The results also reveal the first whispers of a tailwind for homebuilders that the FOMC’s policy shift strengthened. That tailwind is New Orders, which grew by 32% to outpace deliveries by 1300 bps. New orders are a leading indicator for Lennar's business and compounded by the guidance for Q1. 

The Q1 guidance expects new order and delivery growth compared to last quarter and year. New order growth should outpace delivery growth again, and it may be cautious, given the decline in mortgage rates and expected trajectory. Recent data shows the average 30-year mortgage at 7.5%, which is still high but down from the peak and expected to fall throughout the year. 

The technical outlook: Lennar pulls back; don't count on a deep correction

The price action in Lennar is pulling back from its recent peak, but don't expect a deep correction. The weekly candles are robust and supported by bullish indicators that suggest the price updraft is just starting. The stock trades at only 10X its earnings outlook, beating the consensus and guiding higher, providing a deep value for investors.

However, the analysts may provide a hurdle. The analysts have been raising their price targets all year, but the consensus estimate lags the market price. If they don't follow through with additional target increases or upgrades, the market could become range-bound at current levels until sometime in 2024, when there is more certainty in the outlook.