Barclays: A Combined Lennar, CalAtlantic Has $250M In Synergies In 2019

Homebuilder Lennar Corporation LEN announced a deal in October to buy CalAtlantic Group Inc CAA for $7.7 billion, which would make the company one of the top three homebuilders in the U.S.

The Analyst

Barclays analyst Michael Dahl upgraded Lennar from Equal Weight to Overweight and increased the price target from $68 to $72.

The Thesis

Following the CalAtlantic deal, higher returns, margins and growth could materialize, Dahl said in a Wednesday note. The synergy target of $365 million in lofty, the analyst said — he assumes synergies of $250 million, given the challenges with large builder M&A, cost inflation and the potential that both companies were already individually at scale in many markets.

The conservative assumptions still support margin expansion and upside potential, Dahl said. The deal is a clear opportunity to boost CalAtlantic's operational performance, taking the latter's sales pace up from its 2.2 rate in 2017 to Lennar's pace of 3.4 in 2017.

Barclays expects Lennar to outgrow its peers in 2018 and 2019 in orders. The firm also sees balance sheet optionality, as it estimates $1.1 billion and $1.4 billion of operating cash flow, respectively, in 2018 and 2019. That said, Lennar could buy back $1 billion to $1.5 billion in stock while remaining below 35 percent net debt, Dahl said. 

Barclays increased its 2018 and 2019 earnings estimates from $5.06 and $5.89, respectively, to $5.20 and $7.06.

The Price Action

Lennar shares are up over 40 percent over the past year.

At last check, Lennar shares were up 1.74 percent at $61.47. 

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