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Lennar (LEN) Soars to 52-Week High on Solid Housing Demand

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Lennar Corporation (LEN - Free Report) touched a new 52-week high of $117.25 on Dec 9, 2021. The stock pulled back to end the trading session at $115.54, up 0.2% from the previous day’s closing price of $115.34. The uptick was probably due to solid housing demand on the back of historically low mortgage rates.

Per Freddie Mac’s latest Primary Mortgage Market Survey, the average U.S. 30-year fixed-rate mortgage for the week ended Dec 9 declined slightly to 3.10% from 3.11% a week ago. Also, overall mortgage application volume was up 2% week over week for the week ended Dec 3, 2021, per the latest Weekly Mortgage Applications Survey conducted by the Mortgage Bankers Association. The uptick was buoyed by government refinancing, given lower Federal Housing Administration or FHA rate.

In addition to Lennar, D.R. Horton, Inc. (DHI - Free Report) , NVR, Inc. (NVR - Free Report) , and Tri Pointe Homes, Inc. (TPH - Free Report) also achieved their respective 52-week high of $108.87, $5,982.44, and $27.87 yesterday.

The company has been benefiting from solid housing market fundamentals, improving SG&A leverage as well as strategic land investments. Also, its dynamic pricing model, asset-light strategy and solid backlog level bode well.

Zacks Investment ResearchImage Source: Zacks Investment Research

Lennar — a Zacks Rank #3 (Hold) stock — has gained 61.5% in the past year, outperforming the Zacks Building Products - Home Builders industry, Zacks Construction sector, and S&P 500 Index’s 37.3%, 34.3%, and 29.8% growth, respectively. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Meanwhile, earnings estimates for fiscal 2021 and 2022 have gained 1.1% and 1.6%, respectively, over the past 30 days. This indicates 78.5% and 7.1% growth, respectively, on a year-over-year basis. The company’s earnings surpassed analysts’ expectations in the trailing 10 quarters.

Let’s delve deeper into the factors supporting growth.

Favorable Housing Backdrop: The U.S. housing market is witnessing an impressive comeback on major data points post COVID-led shutdowns, with home sales rising at a record pace, defying low inventory levels, broad-based public health risks and supply chain woes. October home sales data depicts the true picture of the same.

For the first nine months of fiscal 2021, Lennar reported revenue and earnings per share growth of 19.4% and 106% year over year, respectively. The quarterly results benefited from solid execution of homebuilding and financial services businesses. Also, robust housing market conditions added to its bliss. Home deliveries and average selling price or ASP also improved 14% and 5%, respectively, from the year-ago level.

Asset Light Strategy: Lennar has maintained its relentless focus on a land lighter strategy. The company continues to migrate toward a significantly smaller land-owned inventory, thereby driving business and cash flow. At fiscal third quarter-end, controlled homesites as a percentage of total owned and controlled homesites increased to 53% from 35% in the corresponding year-ago period. As a result, the year’s supply owned improved to 3.3 years from 3.8 years in the prior year. It reached the goal of 50% homesites controlled in the first half instead of fiscal 2021-end.

Solid Cost Management & Enough Liquidity: Lennar has been successfully meeting the target of achieving lower SG&A percentage since fiscal 2016. During fiscal 2020, SG&A expenses — as a percentage of revenues from home sales — improved 20 basis points or bps, courtesy of improved operating leverage as a result of an increase in home deliveries and continued benefits from technology initiatives. In fact, the company’s first three quarters’ SG&A rate of 7.6% improved 80 bps year over year. The improvement was primarily due to a decrease in broker commissions and benefits from technology efforts. It is focused on reducing operating costs in order to drive the bottom line and cash flow.

Additionally, Lennar has been strategically managing cash to meet the unforeseen conditions that may arise from COVID-19 variants. It ended the fiscal third quarter with $2.62 billion of homebuilding cash and cash equivalents (up sequentially from $2.58 billion). That said, it has no outstanding borrowing under the $2.5-billion revolving credit facility. Hence, it has total homebuilding liquidity of approximately $5.1 billion. Additionally, the company ended the quarter with a homebuilding debt to capital of 21.2%, down from 23.1% at second quarter-end. This is the lowest debt-to-capital ratio Lennar has ever achieved.

Upbeat View: For fourth-quarter fiscal 2021, Lennar expects deliveries of 18000 homes and homebuilding gross margin to be 28%. New orders are likely to be between 15,200 and 15,400 units, and ASP is projected at $445,000. SG&A expenses, as a percentage of home sales, are likely to be 6.7% for the quarter.

The company has solid prospects, as is evident from the Zacks Consensus Estimate for fiscal fourth-quarter earnings of $4.14 per share, which indicates 46.8% year-over-year growth. This leading homebuilder has an impressive VGM Score of A, supported by a Value Score of A and a Growth Score of B. Our VGM Score identifies stocks that have the most attractive value, growth and momentum characteristics.

A Brief Overview of the Other Stocks

D.R. Horton currently carries a Zacks Rank #3. This Texas-based prime homebuilder continues to gain from industry-leading market share, solid acquisition strategy, well-stocked supply of land, lots, and homes along with affordable product offerings across multiple brands.

D.R. Horton’s shares have gained 54.2% over a year. Earnings are expected to rise 24.7% in fiscal 2022.

NVR also carries a Zacks Rank #3. The company engages in the construction and sale of single-family detached homes, townhomes and condominium buildings, primarily constructed on a pre-sold basis.

NVR’s shares have surged 46.9% in the past year. Earnings for 2021 and 2022 are expected to rise 22.9% and 9.9%, respectively.

TRI Pointe currently sports a Zacks Rank #1. This Irvine, CA-based homebuilder designs, constructs, and sells single-family detached and attached homes in the United States. Robust demand and pricing as well as improved operating leverage have been driving TRI Pointe's performance. Cost-cutting initiatives implemented earlier this year and focus on entry-level buyers have been adding to the positives.

TRI Pointe’s shares have surged 61% over a year. Earnings for 2021 and 2022 are expected to rise 80.2% and 9.6%, respectively.