Lennar Corp. (LEN Quick QuoteLEN - Free Report) shares have dropped 0.3% since Dec 14, when it reported fourth-quarter fiscal 2022 results. The whole housing industry has been grappling with supply chain disruptions as well as labor and raw material shortages. 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. The Zacks Building Products - Home Builders industry gained just 0.5% in the same time frame.

Although Lennar has undertaken various price actions and cost-saving moves, it continues to face lower demand and project delays.

A Quick Look at Q4/FY22 Results

In the fiscal fourth quarter, LEN’s earnings beat the Zacks Consensus Estimate by 2% and increased 15% year over year. Revenues missed the consensus estimate by 0.7% but grew 20.6% year over year on the back of 13% improved deliveries and 8% higher home prices.

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However, new orders declined 15% and the potential value of net orders decreased 24% year over year. Backlog at the fiscal fourth quarter end declined 21% and potential housing revenues from backlog fell 23% year over year. The gross margin on home sales contracted 320 basis points (bps).

Stuart Miller, executive chairman of Lennar, said, “As we have seen over the past quarters, interest rates are fluctuating and are likely to continue to move, and the housing market will continue to rebalance pricing and interest rates. While we have a clear-cut strategy of execution, as we look towards 2023, we will only give broad boundaries for deliveries and gross margin.”

Bleak Q1 & FY23 Outlook

For the first quarter of fiscal 2023, the company expects deliveries within 12,000-13,500 homes, with an ASP between $440,000 and $450,000. New orders are likely to be between 12,000 and 13,500 units. SG&A expenses, as a percentage of home sales, are likely to be nearly 8%, with a gross margin on home sales of nearly 21% for the quarter.

In first-quarter fiscal 2022, the company reported deliveries of 12,538 homes with an ASP of $457,000. New orders were 15,747 units. SG&A expenses, as a percentage of home sales, were 7.5% and the gross margin on home sales totaled 26.9%.

For the fiscal 2023, deliveries are likely to be 60,000-65,000 versus 66,399 homes at fiscal 2022-end.

Analysts are pessimistic about LEN’s near-term prospects, as evident from the recent estimate revision trend. Earnings estimates for fiscal 2023 have fallen in the past seven days from $12.31 to $10.50 per share. For fiscal 2022, earnings estimates reflect a 40.2% decline on a 14.7% revenue decrease.

Let’s check the factors that suggest that investors should stay away from LEN — carrying a Zacks Rank #5 (Strong Sell).

Deteriorating Builder Confidence: Per to the latest National Association of Home Builders (NAHB)/Wells Fargo’s Housing Market Index (HMI), published on Dec 19, sentiment among U.S. homebuilders for newly-built single-family homes slipped to the lowest level to 31 in December from mid-2012. This excludes the readings for April 2020 when HMI fell to 30 due to the pandemic.

Higher mortgage rates, elevated construction costs, and softening consumer demand due to rising affordability concerns have dragged builder sentiment down for the 12th straight month in December.

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 recent hikes have significantly impacted the housing sector, increasing mortgage rates by nearly 7%. Interest rate hikes, soaring inflation and a smaller bond-buying program are hitting the affordability of prospective buyers.

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 the inflation by lifting borrowing costs. The recent Freddie Mac’s Primary Mortgage Market Survey shows that the 30-year fixed mortgage rate has gone up to 6.27% for the week ending Dec 22. The rate has moved up by 3.22 percentage points in the past year.

Supply-Chain Bottlenecks & Rising Costs: 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.

Higher labor costs are threatening margins, as they limit homebuilders’ pricing power. Labor shortages are leading to higher wages and delays in construction, which eventually hurt the number of homes delivered. Also, land prices are increasing due to limited availability. This is somewhat exerting pressure on homebuilders’ margins, considering that home prices are moderately increasing.

Key Picks

Some better-ranked stocks that warrant a look in the Zacks Construction sector include EMCOR Group Inc. (EME Quick QuoteEME - Free Report) , Altair Engineering Inc. (ALTR Quick QuoteALTR - Free Report) and ChampionX Corp. (CHX Quick QuoteCHX - Free Report) , each carrying a Zacks Rank #2 (Buy).

EMCOR: Headquartered in Norwalk, CT, this heavy construction company provides electrical and mechanical construction and facilities services in the United States. EMCOR has been benefiting from solid execution in the U.S. Construction segment — comprising the U.S. Mechanical and Electrical Construction units — as well as disciplined cost control. Also, accretive buyouts have been strengthening its overall results by adding new markets, opportunities and capabilities.

EMCOR’s 2023 earnings estimates have increased to $9.10 per share from $8.79 over the past 60 days. Earnings for 2023 are expected to grow nearly 17%.

Altair: This Troy, Michigan-based company provides software and cloud solutions in simulation, high-performance computing, data analytics and artificial intelligence worldwide. Despite significant macroeconomic uncertainty, ALTR has been registering solid growth in billings on a constant-currency basis and witnessing strong demand across all geographies. The company’s focus on delivering services with outstanding technology developments and applications is expected to drive growth.

Altair’s earnings for 2023 are expected to witness 21.5% growth from the year-ago report.

ChampionX: This engineering services company provides chemistry solutions, engineered equipment and technologies to companies that drill for and produce oil and gas. CHX’s Chemical Technologies offering consists of chemistry solutions for flowing oil and gas wells as well as chemistry solutions used in drilling and completion activities.

The company has successfully implemented price increases and surcharges to offset cost inflation. Moreover, CHK remains optimistic about the constructive demand tailwinds in its businesses that support a favorable multi-year outlook for the sector.

ChampionX has an expected earnings growth rate of 46.3% for the next year. The Zacks Consensus Estimate for next-year earnings has improved 4.7% over the last 30 days.