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Lennar Stock Looks Like a Bargain. Here’s Why.


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Everything is starting to line up for housing stocks. Photograph by Joe Raedle/Getty Images
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Home is where the heart is. Lennar777彩票地址 will get a chance to prove it when .

Things haven’t gone so well for Lennar (LEN) since it last reported earnings, on Oct. 2. Sure, the company gained 3.8% that day and continued rising until nearly the end of the month. But from there, it was all downhill, even as the stock market staged an amazing rally to end the year. Lennar dropped 1.6% during the last three months of 2019, while the S&P 500777彩票地址 rallied 8.7%.

Now, with mortgage rates low, home-builder confidence high777彩票地址, and the consumer strong, the backdrop for housing stocks generally appears robust. Lennar looks cheap compared with the market and other home builders, even as it taps into the hottest part of the U.S. housing market.

Everything is starting to line up for housing stocks. The Federal Reserve lowered interest rates last year, causing mortgage rates, a big driver of home sales, to 3.724% at the end of 2019 from 4.55% at the end of 2018, according to Freddie Mac data. Lower mortgage rates, in turn, helped fuel home sales.

777彩票地址 , the most recent data available, rose to 719,000—below forecasts for 730,000, but the fifth time in the past six months that they came in above 700,000. It is the first time since 2007 that the housing market has been able to pull off that feat. Building permits rose 10.5%, while housing starts increased 13.6%.

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777彩票地址“The lower rates continue to have a particularly positive impact at improving the [year-over-year] growth in the biggest of the big ticket purchases (housing),” writes Raymond James strategist Tavis McCourt.

They also have home builders feeling pretty good about business conditions. The National Association of Home Builders/Wells Fargo Housing Market index rose to 76 in December, up from 56 in December 2018 and the highest reading since 1999.

Still, we shouldn’t expect blowout earnings from Lennar. Its sales are forecast to grow just 0.6% during the fourth quarter to $6.5 billion, while earnings per share look set to decline 22%, to $1.90. Even that might be generous: Wedbush analyst Jay McCanless, who has an Outperform rating on Lennar, expects the company to report a profit of $1.89. Profit growth is seen picking up again in 2020, with earnings per share set to rise 8.9%. Meeting or beating those expectations could go a long way toward boosting its shares.

Lennar has other things going for it. For one, Americans want smaller, cheaper houses. Median lot sizes of new single-family homes have been declining since 2009, while the prices of midtier homes have been growing faster than high-tier ones in markets like New York and Atlanta, according to the S&P CoreLogic Case-Shiller Home Price Indices.

It is just these types of homes that Lennar has been pivoting to in recent years. McCanless notes that as of the third-quarter conference call, starter homes were 40% of Lennar’s business, and management expects that to continue in 2020.

777彩票地址“[We] view Lennar as undervalued especially in light of the company’s shift to more affordable product,” McCanless writes.

Even after gaining 43% during the past 12 months, Lennar trades at just 9.3 times 12-month forward earnings. That’s not only well below the S&P 500’s 18.4 times, but it is also the cheapest of the S&P 500’s four home builders, which also include NVR (NVR), D.R. Horton (DHI), and PulteGroup777彩票地址 (PHM).

That sounds like a bargain to us.

Write to Ben Levisohn at Ben.Levisohn@barrons.com


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