🏠Will Lennar Find Buyers As Rates Rise?

Biogen to pay $900M to settle allegations

Hey Global Investor! Here’s what you need to know before the US markets open.

Market Snapshot 📈

S&P 500 (Monday’s Close) 3,655.04 -38.19 (1.03%)

NASDAQ (Monday’s Close) 10,802.92 -65.00 (0.60%)

FTSE 100 (4:00 PM IST) 7,010.99 -10.86 (0.15%)

NIFTY 50 (Today’s Close) 17,007.40 -8.90 (0.052%)

USDINR (4:00 PM IST) 76.10 (1 Year +3.06%)

🔥 Top Movers

ESMT +34.69%
IMPX +20.69%
PLSE +17.65%

EVTL -20.05%
VLTA -17.62%
SLQT -15.09%

Lennar: Housing Troubles?

Lennar Corporation (LEN), US’ largest home building company, is witnessing a decline in new orders. But the management is optimistic that a nationwide shortage of homes will cause a rebalance of price and interest rates. Will buyers knock on their door as spending gets increasingly challenging, even for necessities?

Build To Sell

Gene Fisher and Arnold Rosen founded Lennar in 1954 as F&R Builders. Two years later, in 1956, Leonard Miller, a 23-year-old entrepreneur, who owned land in Florida, became a partner after a $10K investment. The company’s current name combines Leonard Millar & Arnold Rosen.

Three players dominate the US homebuilding market – Lennar, D.R. Horton, and NVR, who control 60% of the market together. D.R. Horton remained the largest homebuilder in the country for years before being surpassed by Lennar.

In 2017, Lennar acquired smaller rival CalAtlantic for $9.3B, including $3.6B in debt, thereby pipping DRH to the post. Lennar anticipated cost savings worth $75M in 2018 and $250M in 2019 post the deal. The 2017-2019 period witnessed a slew of M&A activity within the real estate space. Lennar acquired Florida-based homebuilder WCI Communities, while D.R. Horton acquired a 75% stake in Forestar Group.

Lennar operates four business segments: Homebuilding contributes to 95% of the overall topline, while the rest belongs to mortgage orientation, multifamily rentals, and strategic investments in technology companies.

Last year, Lennar decided to spin off all or parts of its non-core businesses to become a pure-play homebuilder and financial services company. It also announced creating a JV for single-family homes for rent. The spun-off enterprise would have an asset base between $3B-$5B with no debt.

The company also decided to spin off its multifamily apartment business developer and asset manager called Quarterra, formerly known as LMC. Launched in 2011, Quarterra Multifamily is among the most active developers, builders, and asset managers. In its most recent earnings call, Lennar’s management said that Quarterra would be listed “very soon,” subject to approvals from the SEC.

But Will They Sell?

Existing home sales in the US fell 0.4% in August, down for the seventh straight month amid surging mortgage rates and high house prices. Confidence among single-family homebuilders eroded for the ninth consecutive month, while permits for homebuilding fell to the lowest since June 2020.

According to experts, the US Federal Reserve’s aggressive interest rate hikes have weakened the housing market. However, they attributed the smaller-than-expected drop in sales to contracts signed in July when mortgage rates declined and slowed further in August.

Housing Finance major Fannie Mae lowered its total home sales forecast for 2022 to 5.71M units from 5.78M earlier and for 2023 to 4.98M units from 5.18M units earlier. The 30-year fixed mortgage rate averaged 6.02% earlier this month, crossing that mark for the first time since November 2008.

Lennar’s Q3 revenue increased 29% year-on-year, even as interest rates rose. But the effect of the slowdown is seen through a decline in new orders.

Key Highlights From Q3 2022:

  • Revenue: $8.93B Vs $9B expected
  • Earnings per Share: $5.18 Vs $4.91
  • Net Profit: $1.47B Vs $1.41B Year-on-Year

Deliveries increased 13% to 17,248 homes during the quarter, but new orders declined 12% from last year to 14,366 homes. New order value also fell 11% to $6.7B.

Backlog for the quarter remained flat at 25,734 homes, while the backlog dollar value increased 8% to $12.9B. The management said that although supply-chain constraints are improving, they continue to limit deliveries.

For the current quarter, Lennar expects new orders to range between 14K to 15.5K and expects to deliver 20K-21K homes. The company expects a loss of $15M in its homebuilding JV, while its other investments may fetch them a loss of $20M. Here are some other numbers from Lennar’s Q4 guidance:

  • Gross Margins: 26-27%
  • Average Sales Price: $475K-$480K
  • Earnings Per Share: $4.65 – $5.30 Vs $5.40 expected

Executive Chairman Stuart Miller believes demand continues to remain strong despite rising interest rates due to a housing shortage, particularly workforce housing. As a result, he expects an eventual rebalance between price and interest rates as they keep increasing.

However, analysts believe the housing recession shows no signs of abating, and builders are resorting to buy-downs, free amenities, and price reductions to boost sales. They also expect macros and not business fundamentals to drive the performance of homebuilders this year.

Lennar may try every trick in the book, but the key to any form of stability lies in the hands of home buyers and the current interest rate environment. The stock is down 35% this year and is plunging towards its 52-week low. Investors would wait to see the actual impact of the slowdown on Lennar’s current quarter performance and whether they can meet their guidance on deliveries and new orders.

Market Reaction
LEN ended at $73.70, down -4.37%.


Company Snapshot 📈

LEN $73.70 -3.37 (-4.37%.)

Analyst Ratings (18 Analysts) BUY 61%  HOLD 39%  SELL 00%

Newsworthy 📰

  • Attracting Users: Netflix to open video game studio in Finland as streamer tries to boost audience (NFLX -1.03%)
  • Settlement: Biogen to pay $900M to settle allegations it paid doctors kickbacks to prescribe multiple sclerosis drug (BIIB -1.03%)
  • Defence: Ford asks for new trial after $1.7B jury verdict in truck rollover lawsuit (F -2.60%)

Later Today 🕒

  • Cracker Barrel Earnings (CBRL)
  • Jabil Earnings (JBL)
  • United Natural Foods (UNFI)
  • 6:00 PM IST: Durable Goods Orders
  • 7:30 PM IST: New Home Sales

Today’s Fun Fact

90% of the world’s millionaires became rich thanks to real estate.

Disclaimer: The content of this article has been created and published by Winvesta India Technologies Pvt. Ltd., in order to ease the reader’s understanding of the subject matter. The information and/or content (collectively “Information”) provided herein is general information sourced through various news reports and does not constitute a research report or a research analysis. The Information is not intended to offer advice, target or solicit any particular customer or group of customers to buy or sell securities. 

Winvesta does not render any research or advisory services and provides a more detailed description of its services on its website and mobile application along with the terms and conditions published therein from time to time. While reasonable care has been exercised to ensure that the Information is adequate and reliable, no representation is made by Winvesta as to its accuracy or completeness and Winvesta, its affiliates, subsidiaries and employees accept no liability of whatsoever nature for any direct or consequential loss, including without limitation any loss of profits, arising from reliance on this Information. Neither Winvesta nor any of its affiliates are acting as an investment adviser, research analyst or in any other fiduciary capacity. Accordingly, reader’s are expected to undertake their own due diligence in consultation with their own advisors and are advised not to solely rely on the Information. Any such reliance shall be at the reader’s own risk. 

All investments involve risk and the past performance of a security, or financial product does not guarantee future results or returns. There is always the potential of losing money when you invest in securities, or other financial products. Investors should consider their investment objectives and risks carefully before investing.

Start Building Your Global Portfolio Today

Download Winvesta App now to Get Started