Wall Street Has Written Off Lennar. Here's Why That's a Mistake.
Key Points
Lennar is coming off a difficult quarter when it missed revenue and earnings estimates.
The industryʻs outlook is not expected to improve much anytime soon.
Berkshire Hathaway, however, has been buying shares of Lennar stock.
The real estate market has been a mess, and it's not getting better anytime soon. For one of the largest homebuilders in the country, Lennar (NYSE: LEN), that's bad news.
Lennar stock is down 20% year-to-date and 34% over the past year, as revenue and earnings have declined through the first eight months of the year. In the latest quarter ended Aug. 31, revenue fell 9% year over year to $8 billion, and earnings cratered 49% to $1.19 per share. Lennar missed analysts' estimates for both.
Missed AI’s "Act 1"? Act 2 Could Be 15x Bigger. Most investors think they missed the AI boat because they didn't buy Nvidia in 2005. But according to our analysts, we’re only at the end of "Act 1"—the R&D phase. "Act 2" is the global rollout. Continue »
The reason is a combination of factors, but mainly because people aren't buying, selling, or building due to inflation, rising mortgage rates, incentives, and macroeconomic uncertainty.
Image source: Getty Images.
"Mortgage rates increased through the quarter, with the 30-year rate at approximately 6.8% at quarter-end and even higher since," CEO Stuart Miller said in the Q3 earnings release. "Rates are responding as inflation remains above the Fed's target, driven by geopolitical tension and higher oil prices. Additionally, consumer confidence has declined as rates and affordability have driven more consumers to slow their purchase decision."
Its outlook is not good either, as rates are expected to continue to rise with the Fed eyeing another hike. In the fourth quarter, Lennar anticipates 19,500 to 20,500 new orders, which would be below the 20,879 in Q3. And the Q3 orders were down 9%. Also, the financial services segment, its mortgage processing arm, is expecting income of $90 million to $95 million, down from $129 million in Q3.
Wall Street says "sell"
Lennar stock got a slew of price target downgrades after releasing its fiscal third-quarter earnings on Sept. 16. It's not a huge surprise, given the current environment and outlook. Barclays cut its price target to $70 from $79 and kept an underweight rating, while BTIG lowered it to $63 from $67 with a sell rating. RBC maintained a sell rating and reduced the target to $69 from $85, citing the weak outlook and pressure on margins.
The median price target among analysts is $72.50 per share, which suggests a 15% decline from its current $84 per share. Further, 48% rate it a sell, with only 13% calling it a buy.
But Berkshire Hathaway is buying
A surprising thing about Lennar is that amid all the sell ratings, Berkshire Hathaway (NYSE: BRKB) (NYSE: BRKA) was buying Lennar stock in Q2. CEO Greg Abel's holding company added roughly 3 million shares of Lennar stock in Q2, a 30% increase. It now owns about a 5.5% stake in outstanding Lennar stock.
What do Berkshire Hathaway and Abel see that the market is missing?
The renowned value investors probably see a cheap, cyclical stock that's a market leader and may be scraping the bottom now but is bound to recover from pent-up demand when rates ease and the economy improves. But they can afford to play the long game.
I'm not saying it's a buy right now, but if you hold it, you may want to think twice before selling it. Instead, wait for more visibility on the economy, perhaps until after the midterm election.
Dave Kovaleski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway and Lennar. The Motley Fool has a disclosure policy.