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Why You Should Consider Buying Lennar (LEN) Amid Challenges

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The housing market is indeed reeling under affordability concerns amid rising mortgage rates and tight supply. Sales are dwindling, and buyers are worried about major hurdles like rising prices and mortgage rates.

That said, there is still a glimmer of hope as analysts are cautiously optimistic about the housing market in the United States, given pent-up demand from a low supply. Investors should note that despite the second straight monthly decline in sales of new U.S. single-family homes for February, reported by the Commerce Department, sales remained above the pre-pandemic level. Market pundits are of the opinion that the new homes market will likely improve gradually this year, given pent-up demand, tight supply and notable wage gains.

Lennar Corporation (LEN - Free Report) is one such company that continues to display strength in several areas. Hence, adding the stock to your portfolio should not be a disappointment. Lennar is among the homebuilding companies that remain relatively well positioned, courtesy of impressive performance backed by effective cost control and a solid backlog. Also, focus on the lighter land/asset strategy to boost free cash flow is encouraging.

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The company’s shares have lost more than 34% year to date compared with the Zacks Building Products - Home Builders industry’s 33% decline. Nonetheless, earnings estimates for fiscal 2022 and 2023 have moved up 3.9% and 6.7%, respectively, over the past 30 days. LEN also has a solid earnings surprise history, having surpassed the Zacks Consensus Estimate in all the trailing 12 quarters. This positive trend signifies bullish analysts’ sentiments and justifies the company’s Zacks Rank #2 (Buy), indicating robust fundamentals and the expectation of outperformance in the near term. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Let us delve deeper into other factors that make this stock a profitable pick.

What Makes the Stock an Attractive Pick?

Higher Operating Leverage

During fiscal 2021, selling, general & administrative (SG&A) expenses — as a percentage of revenues from home sales — improved 100 basis points or bps, courtesy of a decrease in broker commissions, improved operating leverage and continued benefits from technology initiatives. The company is focused on reducing operating costs in order to drive the bottom line and cash flow. For the fiscal first quarter as well, SG&A expenses improved 90 bps.

LEN has been making sustained efforts in reducing both construction and SG&A expenses via controlling construction costs by designing homes efficiently.

Upbeat Projection

With the housing industry continuing to exhibit strong demand, outweighing supply, Lennar remains confident to continue generating solid growth and enhancing its current market position. For fiscal 2022, Lennar now expects deliveries of 68,000 homes (versus 67,000 homes expected earlier) and homebuilding gross margin within 27.25-28% (with the earlier expectation being 27-27.5%). The average selling price or ASP is projected within $470,000-$475,000 (versus $460,000 projected before). SG&A expenses, as a percentage of home sales, are likely to be 6.6-6.8%. Earlier, Lennar expected SG&A of 6.8-6.9% for the year.

Solid Backlog Level

Backlog at fiscal first quarter-end climbed 24% from a year ago to 27,335. Potential housing revenues from backlog also advanced 43% year over year to $13.6 billion. The company is well positioned to deliver solid results for fiscal 2022, given a strong backlog and the current housing fundamentals.

Solid Earnings Growth Rate

The company has solid prospects, as is evident from the Zacks Consensus Estimate for fiscal 2022 and 2023 earnings of $16.43 and $17.94 per share, which indicates 15.1% and 9.2% year-over-year growth, respectively.

Land Lighter Strategy

Lennar has maintained its relentless focus on a land lighter strategy. The company continues to migrate toward a significantly smaller land-owned inventory, driving business and cash flow. At fiscal first quarter-end, controlled homesites as a percentage of total owned and controlled homesites increased to 58% from 45% in the year-ago period. As a result, the year’s supply owned remained flat with the prior year at 3.4 years. It intends to increase the controlled homesites percentage to 65% by the end of fiscal 2022.

Other Top-Ranked Stocks From the Broader Construction Sector

M.D.C. Holdings, Inc. (MDC - Free Report) currently holds a Zacks Rank #2. The company’s build-to-order operating model and focus on more affordable homes have been major driving factors.

M.D.C. Holdings’ earnings are expected to grow 35.5% in 2022.

TRI Pointe Group Inc. (TPH - Free Report) currently carries a Zacks Rank #2. 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 earnings for 2022 are expected to grow 20.9%.

Owens Corning (OC - Free Report) currently carries a Zacks Rank #2. OC’s earnings topped the consensus mark in the last four quarters, with the average being 15.5%.

Earnings for Owens Corning are expected to increase 40.5% in 2022.