On Sep 30, we reverted to a Neutral recommendation on
) from Outperform as we believe that the recent spike in interest
rates is slightly slowing down the housing recovery.
Why Back to Neutral?
Though Lennar announced strong fiscal third-quarter results on
Sep 24, it witnessed a slowdown in order growth.
Lennar beat the Zacks Consensus Estimate for both earnings and
revenues on the back of the strong momentum in the housing
market. Adjusted earnings of 54 cents per share grew 35% year
over year driven by double-digit growth in homebuilding revenues
and solid margins.
However, even though homebuilding revenues grew 53% in the
quarter, net order pace slowed down. Though new home order grew
14% year over year, it declined sequentially.
The recent increase in interest/mortgage rates has slowed
order pace and traffic. With the recent improvement in economic
conditions and the housing market in general, mortgage rates are
edging upwards to more normalized levels since May. High interest
rates dilute the demand for new homes, as mortgage loans become
expensive; thus lowering a buyer's purchasing power. Accordingly,
the sharp increase in interest rates shocked many customers and a
few put off their purchase decisions.
Management is optimistic that the moderating sales pace is
only temporary and is confident of seeing strong demand in future
quarters as buyers adjust to the rising interest rates and
increasing home prices and return to the market. Moreover, easing
credit standards and limited supply (arising from low home
inventories of both for new and existing homes) is expected to
drive demand growth.
However, we prefer to remain on the sidelines until we
actually see a rebound in order growth.
Other Stocks to Consider
Lennar carries a Zacks Rank #3 (Hold). Other homebuilders
which are currently doing well include
Standard Pacific Corp.
Beazer Homes USA Inc.
). Both the companies carry a Zacks Rank #1 (Strong Buy). Among
the building products companies,
) is worth mentioning which carries a Zacks Rank #2 (Buy).
BEAZER HOMES (BZH): Free Stock Analysis
LENNAR CORP -A (LEN): Free Stock Analysis
MASCO (MAS): Free Stock Analysis Report
STANDARD PAC (SPF): Free Stock Analysis
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