This is no Time to Buy Lennar but the Time is Coming

Key Points

• Lennar beat Q4 expectations but the stock is moving lower because of guidance. 
• The outlook points to a sharp contraction in the home-building industry. 
• This is bad news in the near term but sets up an opportunity for later in 2023. 

Lennar Corporation NYSE: LEN has a lineup is on the higher end of the housing spectrum. Its balance sheet is in the best shape it has been in for years. The problem is not the supply-demand situation because that remains firmly in favor of all the homebuilders. The problem is in the near to midterm outlook which is deteriorating quickly.

The sudden rise of interest rates, the persistent quality of inflation and the impact on the housing market have been profound. While Q4 and FY 2022 were solid years for Lennar, KB Home NYSE: KBH, D.R. Horton Inc. NYSE: DHI and others, the guidance points to a sharp contraction in revenue and earnings in 2023. 

"Our sales volume and pricing have clearly been impacted by rising interest rates, but there remains a significant national shortage of housing, especially workforce housing and there is still demand as we navigate the rebalance between price and interest rates," said the executive chairman Stuart Miller.

Lennar Falls on Weak Guidance 

Lennar’s Q4 results prove both the strength of demand within the housing market and the impact of rising interest rates. The company’s revenue increased by 21% year-over-year (YOY) to $10.17 billion and it beat the Marketbeat.com consensus but the guidance is weak. In regard to Q4, sales were driven by a 13% increase in deliveries and an 8% increase in home prices which led to strong results on the bottom line as well. The margins contracted at both the gross and housing levels but less than expected, which left the adjusted earnings up double digits and the adjusted EPSup 16% including the aid of share repurchases. The $5.02 in adjusted earnings beat by $0.12 but this is where the strength ends. 

Looking forward, none of the news is good. The company reports a 15% contraction in new orders and is expecting a similar rate in FQ1. The backlog is down is 21% driven by an increase in cancellations which are running at 26% compared to only 12% in the previous year. The backlog and new orders are even more worrisome because both are coupled with price declines that have the net values down 24% and almost 25%, respectively. In regard to guidance, the company is expecting deliveries for Q1 and FY2023 below the analyst consensus and there is a high risk of underperformance so the stock is moving lower. 

The Analyst's Sentiment Firmed for Lennar 

The analyst sentiment in Lennar is firming but take this with a grain of salt. The rating of 16 analysts is a very weak "moderate buy" and up on a couple of upgrades that came out before the F2023 guidance was released. The price target is up as well but only implies 10% of upside and there are other risks as well. The stock has been pressured lower by the institutions which upped the pressure in the first two months of December 2022. In this light, the stock may see some upward movement but gains will likely be capped in the range of $92. 

The chart was looking bullish going into the report but the best that can be said now is the stock is range bound. The top of the range is near $92 and it may hold until the outlook for home building sales improved. The latest read on the NAHB Home Builder Sentiment Index does not suggest that will be anytime soon. Based on what the FOMC just said, that time may not come until well into 2024, if not later. Between now and then there will be ample opportunity to buy into this name.