On Feb 18, we reverted back to a Neutral rating on U.S. homebuilder, Lennar Corporation (LEN - Analyst Report) from Outperform, as we await a more sustainable recovery in the overall economy. Lennar also carries a Zacks Rank #3 (Hold).
Why Back to Neutral?
Lennar has witnessed solid year-over-year growth in new home orders, average selling prices and home closings in all the quarters of 2012. Margins have also been above average despite rising costs, driven by strong operating leverage. We believe that the company is performing better than its peers by increasing sales prices, reducing incentives, improving volumes and making opportunistic land acquisitions.
Though witnessing an improving trend, the U.S. new home demand remains at historically low levels due to the current weak U.S. economic conditions and tight mortgage lending standards. Sustainable increases in housing and housing demand for the long term will require the overall economy to strengthen, including further job growth. Consumers will remain cautious until job growth, continued home price appreciation and easier access to credit improve their confidence. Further, the pending federal budget decisions could potentially disrupt the housing recovery. Moreover, the housing recovery was uneven and not broad based with some markets showing more upward momentum than others. A sustainable housing recovery in the long term can be achieved only through a broad-based recovery in the overall economy, which we believe will take time. We thus revert back to a Neutral rating.
Housing Stocks That Warrant a Look
Some other housing stocks worth a look are NVR Inc. (NVR - Snapshot Report) - Zacks Rank #1 (Strong Buy), DR Horton Inc.(DHI - Analyst Report) - Zacks Rank #2 (Buy), and Ryland Group Inc. (RYL - Snapshot Report) - Zacks Rank #2 (Buy)