Yahoo Finance Will Lennar (LEN) Bloom in 2023 Amid Inflationary Pressures?
Lennar Corporation LEN and other homebuilders are still witnessing the impacts of inflation and supply chain woes. Although the situation has improved since January as builders are regaining confidence in the near future, 2023 is not expected to level up to the prior year.
Lennar shares have gained 46.6% in the past year compared with the Zacks Building Products - Home Builders industry’s 44.6% growth.
On a positive note, Lennar has undertaken various price actions and cost-saving moves that are helping it mitigate macroeconomic woes. Also, digital marketing platforms, a land-lighter strategy and a dynamic pricing model bode well. A stronger liquidity positions Lennar well for the future.
Image Source: Zacks Investment Research
Yet, supply chain disruptions as well as labor and raw material shortages are eating up homebuilders’ margins. The Federal government’s back-to-back interest rate hikes are adding to the woes. Although LEN has adopted a price-to-market strategy, which means the company is continuously finding the market clearing price for each of its homes on a community-by-community basis, fiscal 2023 is likely to remain challenging.
Let’s check the factors that suggest LEN — a Zacks Rank #3 (Hold) company — is not expected to boost profits in 2023.
Bleak Q2 & FY23 Outlook: For second-quarter fiscal 2023, the company expects deliveries within 15,000-16,000 homes versus 16,549 homes reported in the first quarter of fiscal 2022. The ASP is expected to be between $435,000 and $445,000, down from $483,000 reported a year ago. New orders are likely to be between 16,000 and 17,000 units compared with 17,792 units a year ago. Home sales gross margin is expected to be 21-21.5% versus 29.5% and SG&A expenses are likely to be within 7.2-7.4%, up from 6.1% a year ago.
For fiscal 2023, the company expects deliveries within 62,000-66,000 homes, down from 66,399 units in fiscal 2022.
Analysts are pessimistic about LEN’s near-term prospects, as evident from the recent trend in estimate revisions. Earnings estimates for fiscal 2023 reflect a 44.6% year-over-year decline to $9.72 per share on 12.6% lower revenues. For fiscal second-quarter, earnings estimates reflect a 51% decline on a 14.3% revenue decrease.
High Costs & Low Supply: Lennar, like any other industry player, has been witnessing challenges related to raw material shortages and municipal delays. Raw material inflation is eating into homebuilders’ margins. Although Lennar has been navigating the challenges associated with supply shortages skillfully, these headwinds pose serious threats to the company’s margins.
The fiscal first quarter’s gross margin on home sales was 21.2%, down 570 bps. The downside can be attributed to an increase in cost per square foot, primarily owing to increased material and labor costs. Land costs also increased year over year. Net margin, as a percentage of home sales, contracted 560 bps to 13.8%.
Fed’s Interest Rate Hikes: The housing industry is cyclical and affected by consumer confidence levels, prevailing economic conditions and interest rates. The Fed's determination to curtail inflation through interest rate increases and quantitative tightening has started to show the desired effect of slowing down sales in some markets across the country.
In May 2023, the Federal Reserve raised the target range for its benchmark interest rate by 0.25% while leaving its options open on future rate hikes. The central bank's move pushed the Fed funds rate to a new range of 5%-5.25%, the highest since September 2007.
Key Picks
Beazer Homes USA BZH designs, constructs, and sells single-family and multi-family homes under the Beazer Homes, Gatherings, and Choice Plans names.
BZH currently sports a Zacks Rank #1 (Strong Buy). Its shares have gained 76.5% this year so far. BZH’s 2023 earnings per share have increased to $3.95 per share from $3.56 over the past 60 days, respectively. Again, it carries an impressive VGM Score of B. You can see the complete list of today’s Zacks #1 Rank stocks here.
PulteGroup Inc. PHM has been reaping benefits from the successful execution of strategic initiatives to boost profitability, with a focus on entry-level homes.
PulteGroup, presently flaunts a Zacks Rank #1, has jumped 58.5% year to date. The Zacks Consensus Estimate for its 2023 and 2024 earnings has been upwardly revised by 4% and 4.4%, respectively, over the past 30 days. Its earnings topped consensus estimates in three of the trailing four quarters and missed on one occasion, with the average surprise being 15.6%. Again, it carries an impressive VGM Score of A.
NVR Inc.’s NVR lot acquisition strategy helps the company to avoid financial requirements and risks associated with direct land ownership and land development. This strategy allows it to gain efficiencies and a competitive edge over its peers.
NVR, currently sports a Zacks Rank #1, has gained 25.6% this year. NVR has seen an upward estimate revision for 2023 over the past 30 days by 1.7%.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
PulteGroup, Inc. (PHM) : Free Stock Analysis Report
Lennar Corporation (LEN) : Free Stock Analysis Report
Beazer Homes USA, Inc. (BZH) : Free Stock Analysis Report
NVR, Inc. (NVR) : Free Stock Analysis Report
