Lennar Corporation LEN shares have been improving over the past six months. It gained 36.3% in the said period compared with the Zacks Building Products - Home Builders industry’s 40.8% rally.
Lennar has undertaken various price actions and cost-saving moves that are helping it mitigate macro-economic woes. Also, digital marketing platforms, a land-lighter strategy and a dynamic pricing model bode well. Stronger liquidity position places Lennar well for the future.
However, supply chain disruptions as well as labor and raw material shortages are eating up homebuilders’ margins. With rising inflation — particularly for materials and transportation — the Fed’s back-to-back interest rate hikes and affordability issues are adding to the woes.
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Although LEN has adopted a price-to-market strategy, which means the company is continuously finding the market clearing price for each of its homes on a community-by-community basis, fiscal 2023 is likely to remain challenging.
A Quick Look at Q1 FY'23 Results
In the fiscal first quarter, LEN’s earnings decreased by 21% year over year despite 5% higher revenues. New orders declined by 10% from the year-ago quarter to 14,194 homes, thanks to a cancellation rate of 21%, compared to 10% last year. The potential value of net orders also decreased by 18% year over year. Backlog at quarter end declined 29% and potential housing revenues from backlog decreased 33% year over year.
The fiscal first quarter gross margin on home sales was 21.2% for the quarter, down 570 basis points (bps). The downside can be attributed to an increase in costs per square foot, primarily owing to increased material and labor costs. Land costs also increased year over year. Net margin as a percentage of home sales contracted 560 bps to 13.8%.
Let’s check the factors that suggest that investors should hold on to LEN — a Zacks Rank #3 (Hold) company — now. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Bleak Q2 & FY'23 Outlook: For second-quarter fiscal 2023, the company expects deliveries within 15,000-16,000 homes versus 16,549 homes reported in the first quarter of fiscal 2022. The ASP is expected to be between $435,000 and $445,000, down from $483,000 reported a year ago. New orders are likely to be between 16,000 and 17,000 units compared with 17,792 units a year ago. Home sales gross margin is expected to be 21-21.5% versus 29.5% and SG&A expenses is likely to be within 7.2-7.4%, up from 6.1% a year ago.
For fiscal 2023, the company expects deliveries within 62,000-66,000 homes, down from 66,399 units in fiscal 2022.
Analysts are pessimistic about LEN’s near-term prospects, as evident from the recent estimate revision trend. Earnings estimates for fiscal 2023 reflect a 46% year-over-year decline to $9.47 per share on 13.1% lower revenues. For fiscal second-quarter, earnings estimates reflect a 52% decline on a 15% revenue decrease.
High Costs & Low Supply: Lennar, like any other industry player, has been witnessing challenges related to raw material shortages and municipal delays. Raw material inflation is eating into homebuilders’ margins. Although Lennar has been navigating the challenges associated with supply shortages well, these headwinds pose serious threats to the company’s margins.
The fiscal first quarter gross margin on home sales was 21.2% for the quarter, down 570 bps. The downside can be attributed to an increase in cost per square foot, primarily owing to increased material and labor costs. Land costs also increased year over year. Net margin as a percentage of home sales contracted 560 bps to 13.8%.
Concerning Housing Prospect: Per the latest National Association of Home Builders (NAHB)/Wells Fargo’s Housing Market Index (HMI), published on Mar 15, sentiment among U.S. homebuilders for newly built single-family homes inched up to 44 in March from 42 in February. Although long-term interest rates have been reduced, which will help boost housing demand in the near term, the cost and availability of housing inventory remain critical constraints for prospective home buyers. Per the New NAHB 2023 Priced-Out Estimates, 96.5 million households in the United States are not able to afford a median-priced new home.
Higher mortgage rates, elevated construction costs and softening consumer demand due to rising affordability concerns have dragged new home sales to a seasonally adjusted annual rate of 640,000 in February, down 19% from the prior year. This is likely to remain a headwind for the rest of 2023.
Fed’s Interest Rate Hikes: The housing industry is cyclical and affected by consumer confidence levels, prevailing economic conditions and interest rates. The Fed's determination to curtail inflation through interest rate increases and quantitative tightening has started to show the desired effect of slowing down sales in some markets across the country.
The U.S. Fed started to increase rates in early 2022, increasing the total interest rate by 450 bps. On Mar 22, 2023, the Fed raised interest rates by a quarter percentage point. This set the U.S. central bank's benchmark interest rate in the 4.75%-5.00% range.
The interest-rate-sensitive housing sector in the United States has been dented by the rising mortgage rates as the Fed made a move to curb inflation by lifting borrowing costs. Interest rate hikes, soaring inflation and a smaller bond-buying program are hitting the affordability of prospective buyers.
Some better-ranked stocks in the Zacks Construction sector are:
United Rentals, Inc. URI currently carries a Zacks Rank #2 (Buy). Shares of URI have gained 47% in the past six months. The long-term earnings growth rate is anticipated to be 16.3%.
The Zacks Consensus Estimate for URI’s 2023 sales and EPS indicates growth of 20.3% and 29%, respectively, from the previous year’s reported levels.
Sterling Infrastructure, Inc. STRL currently carries a Zacks Rank #2. STRL has a trailing four-quarter earnings surprise of 19.3%, on average. Shares of the company have gained 80.7% in the past six months.
The Zacks Consensus Estimate for STRL’s 2023 sales indicates a 0.8% decline, while that for EPS suggests 10.8% growth, from the previous year’s reported levels.
Skyline Champion Corporation SKY currently carries a Zacks Rank #2. SKY has a trailing four-quarter earnings surprise of 43.2%, on average. Shares of the company have gained 33.6% in the past six months.
The Zacks Consensus Estimate for SKY’s fiscal 2024 sales and EPS indicates a decline of 11.7% and 37.9%, respectively, from the previous year.
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