Analysts Say Homebuilder Environment Still Looks Good For Lennar

Lennar Corporation (NYSE:LEN) stock remains attractive in the long term, sell-side analysts said Wednesday after investors sent the share price on a post-earnings roller-coaster ride.

The homebuilder had a strong earnings and revenue beat that boosted the stock early Tuesday, but sellers brought it back down after the earnings conference call amid concerns over fourth-quarter gross margin guidance.

The macroeconomic environment, including still-low interest rates, however, continue make the stock attractive, analysts said, although with lowered EPS expectations.

The Analysts

Bank of America Merrill Lynch analyst John Lovallo reiterated a Buy rating on Lennar but lowered the price target from $57 to $55.

Wells Fargo’s Stephen East revised earnings estimates downward but kept an Outperform rating on the stock with a $62 price target.

Wedbush analyst Jay McCanless reiterated an Outperform rating with a $62 target price.

KeyBanc’s Kenneth Zener remains Overweight on the stock with a target price of $57.

The Theses

Investors are clearly very sensitive to gross margin performance, and because of that, “nearterm, the equity is likely put in the penalty box until 3Q earnings,” East wrote in a note.

However, East said Lennar's price below large-cap peers, and the current environment of recovering housing demand and low interest rates compensates for the gross margin risk and makes the stock attractive long term.

“We believe the current backdrop of solid employment and lower interest rates argue for a healthy housing environment,” East wrote. “Further, given the housing underproduction this cycle, we agree with LEN’s assessment that housing has a more elevated floor versus past cycles should a recession occur.”

Lovallo agreed.

“We view LEN as an above average homebuilder and believe management's positive industry commentary, driven in part by lower mortgage rates and moderating home price appreciation, should stimulate renewed investor interest in the group,” Lovallo wrote.

McCanless said the post-conference call sell-off was unwarranted, agreeing that current mortgage rates are a demand tailwind for Lennar and the homebuilding industry as a whole.

Zener remained bullish on Lennar overall as well, also thinking the sector will continue to benefit from lower rates.

Price Action

Lennar shares closed Wednesday down 1.39% at $47.55.

Related Links:

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