Single-family homes with rooftop solar panels and pools at a Lennar development in San Diego last year.
Bing Guan/Bloomberg
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The U.S. faces a severe shortage of housing. One recent study put the shortfall at about six million units. As one of the country’s top home builders,
Lennar
is well positioned to help fill that gap.
Home-building stocks recently fell about 15% from their May highs amid worries that sales would slow nationwide as home prices rise. This past week, however, Lennar (ticker: LEN) reported strong quarterly results showing that demand remains elevated. Its shares have climbed 7% since.
“The party isn’t over,” says Ken Leon, an analyst at CFRA. “The housing market still has incredibly strong drivers. This is a multiyear opportunity.” He cites high household savings, low debt, rising home equity, and a strong stock market.
At $98, Lennar’s Class A shares look appealing. They trade for less than eight times projected earnings of $12.57 a share in its fiscal year ending in November and yield just over 1%.
Investors can also buy Lennar’s supervoting Class B shares and align themselves with Chairman Stuart Miller, Lennar’s controlling shareholder, at a bargain price of $79. It’s very unusual for supervoting shares to trade at such a big discount to regular stock. The discount reflects a small float, limited liquidity, and the inability to convert the B shares, which have 10 votes each, into the single-vote A stock. The two classes are economically equivalent and get the same annual dividend of $1 a share. Ultimately, the gap between the two classes of stock may close.
“Lennar is a well-run business that has a great track record of creating value,” says Larry Pitkowsky, manager of the GoodHaven mutual fund, who favors the B shares.
The company earned $2.65 a share in the May quarter, 27 cents above the consensus estimate. New orders and pricing were better than expected in what Lennar’s Miller called a “very strong” housing market. Orders were up 32% in the quarter versus the year-earlier period, and pricing rose 6%.
Despite rising input costs like lumber, Lennar’s gross margin expanded 4.5 percentage points, to 26.1%, and the company earned a robust return on equity of about 19%.
“The results were impressive across the board,” says Stephen Kim, an analyst at Evercore ISI. Lennar’s guidance for the current fiscal year led to upward revisions to analysts’ earnings estimates. Kim is among the most bullish on Wall Street, with an estimate of $15.90 for fiscal 2022, about $2.50 a share above the consensus. Others are moving in his direction.
Kim says that builders like Lennar are seeking to maximize profits rather than sales volume, and have started to auction homes in hot markets. He has an Outperform rating and a $160 price target on the stock.
Lennar is valued in line with its peers, but trades at a steep discount to the overall market.
Management gets high marks from investors for boosting returns, cutting debt, and making well-timed acquisitions and technology investments, including an early one in
Opendoor Technologies
(OPEN), which buys homes directly from sellers.
Unlike luxury builder
Toll Brothers
(TOL), Lennar builds houses for entry-level and move-up buyers. Its average selling price is half that of Toll, at $414,000, and just over 2,000 square feet.
Its largest markets are Florida, Texas, and California. Lennar has identified Texas as its strongest state market and Austin as the top city.
The company also operates a multi-family rental-housing business and formed a joint venture that will hold and rent single-family homes.
Lennar bought back $142 million of stock in the past two quarters. With its debt-to-capital ratio down to 23%, half the level of four years ago and one of the lowest among major builders, Lennar could ramp up its buyback program and lift its dividend.
*Sept. fiscal year end **Nov. fiscal year end ***Oct. fiscal year end E=estimate
Source: Bloomberg
It plans to spin off a rental portfolio, technology investments, and other assets valued at a total of $5 billion to $6 billion, while retaining its core home-building and finance business. Lennar declined to talk to Barron’s.
Bill Smead, chief investment officer at Smead Investment Management, a Lennar shareholder, notes that millennials are leaving high-price cities for less-expensive suburban areas.
“Some people think it’s temporary and that millennials will crawl back to apartments in Seattle, San Francisco, or Manhattan,” he says. “They’re wrong. Millennials are having families, and they’re not going back.”
That trend could mean many years of healthy sales for Lennar.
Write to Andrew Bary at andrew.bary@barrons.com