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Lennar

Asset Light Model And Rausch Coleman Acquisition Will Build Success

AN
Consensus Narrative from 15 Analysts
Published
24 Sep 24
Updated
26 Mar 25
Share
AnalystConsensusTarget's Fair Value
US$138.60
17.4% undervalued intrinsic discount
26 Mar
US$114.51
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1Y
-29.5%
7D
-2.7%

Author's Valuation

US$138.6

17.4% undervalued intrinsic discount

Analyst Price Target Fair Value

Key Takeaways

  • Transitioning to an asset-light model and just-in-time delivery aims to improve cash flow and enhance future revenue and net margins.
  • Expanding market share through acquisitions and consistent volume focus positions Lennar for revenue growth and increased shareholder returns.
  • Higher mortgage rates and reduced consumer confidence are pressuring Lennar's revenues, margins, and profitability due to constrained home supply and increased sales incentives.

Catalysts

About Lennar
    Operates as a homebuilder primarily under the Lennar brand in the United States.
What are the underlying business or industry changes driving this perspective?
  • Lennar's transition to an asset-light, land-light model with just-in-time delivery is expected to generate more predictable volume and growth, reducing the asset base and risk profile while improving cash flow, thus enhancing future revenue and net margin potential.
  • The company's focus on driving consistent volume and production efficiency by matching production pace with sales pace aims to maximize profitability and operational efficiency. This strategy is expected to lower construction costs and cycle times, thereby impacting future earnings positively.
  • The acquisition of Rausch Coleman and the expansion into new markets are expected to increase Lennar's market share and facilitate growth in community count and volume, positioning the company for future revenue growth as market conditions stabilize or improve.
  • Lennar's ability to incentivize affordability and maintain strong cash flow even at reduced profitability is designed to keep sales volume high and inventory levels appropriately sized, preparing the company for normalized margins when market conditions improve, likely impacting future net margins.
  • The execution of capital return strategies, including share repurchases and dividends, leveraged by strong cash flow generation and a well-managed balance sheet, positions Lennar to increase total shareholder returns, potentially resulting in higher EPS as a catalyst for stock valuation improvement.

Lennar Earnings and Revenue Growth

Lennar Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?
  • Analysts are assuming Lennar's revenue will grow by 4.4% annually over the next 3 years.
  • Analysts assume that profit margins will shrink from 11.0% today to 7.7% in 3 years time.
  • Analysts expect earnings to reach $3.1 billion (and earnings per share of $14.76) by about March 2028, down from $3.9 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $3.5 billion in earnings, and the most bearish expecting $2.3 billion.
  • In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.2x on those 2028 earnings, up from 8.0x today. This future PE is greater than the current PE for the US Consumer Durables industry at 10.0x.
  • Analysts expect the number of shares outstanding to decline by 4.61% per year for the next 3 years.
  • To value all of this in today's terms, we will use a discount rate of 8.59%, as per the Simply Wall St company report.

Lennar Future Earnings Per Share Growth

Lennar Future Earnings Per Share Growth

Risks

What could happen that would invalidate this narrative?
  • Higher mortgage interest rates have left the housing market weaker for longer, potentially impacting Lennar's future revenues and net margins.
  • Decreased consumer confidence and elevated personal debt levels are impeding mortgage access, which could constrain revenue growth.
  • The overall supply of homes remains constrained by restrictive land permitting and higher construction costs, impacting earnings potential.
  • Increased sales incentives are putting additional pressure on margins, reducing profitability even as sales volume is maintained.
  • The asset-light, land-light model results in lower gross margins due to the reliance on land bank partnerships, which may affect net earnings over time.

Valuation

How have all the factors above been brought together to estimate a fair value?
  • The analysts have a consensus price target of $138.6 for Lennar based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $200.0, and the most bearish reporting a price target of just $110.0.
  • In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $40.3 billion, earnings will come to $3.1 billion, and it would be trading on a PE ratio of 13.2x, assuming you use a discount rate of 8.6%.
  • Given the current share price of $117.74, the analyst price target of $138.6 is 15.1% higher.
  • We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.

How well do narratives help inform your perspective?

Disclaimer

Warren A.I. is a tool utilizing a Large Language Model (LLM) that ingests data on consensus price targets, forecasted revenue and earnings figures, as well as the transcripts of earnings calls to produce qualitative analysis. The narratives produced by Warren A.I. are general in nature and are based solely on analyst data and publicly-available material published by the respective companies. These scenarios are not indicative of the company's future performance and are exploratory in nature. Simply Wall St has no position in the company(s) mentioned. Simply Wall St may provide the securities issuer or related entities with website advertising services for a fee, on an arm's length basis. These relationships have no impact on the way we conduct our business, the content we host, or how our content is served to users. The price targets and estimates used are consensus data, and do not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that Warren A.I.'s analysis may not factor in the latest price-sensitive company announcements or qualitative material.

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