Resale Inventory Drought And Millennial Demographics: Lennar Poised For Multi-Year Benefits, Says Analyst

JMP Securities analyst Aaron Hecht reiterated a Market Outperform rating on the shares of Lennar Corp (NYSE: LEN) and raised the price target from $115 to $135.

The company's 2Q23 normalized EPS of $2.94 beat the analyst consensus, and the revenue of $8.04 billion beat the consensus of $7.18 billion.

According to the analyst, the outperformance was driven by higher deliveries, better ASP, and a beat in financial services.

Although homeownership affordability has declined since the Fed began to raise interest rates, LEN has continued to see strong demand for their product, primarily due to resale inventory being in short supply.

The analyst does not see market fundamentals changing to ease the resale inventory drought, which, combined with millennial demographics, should benefit builders for multiple years.

The analyst believes excess cash flow will be generated as land inventories become more efficient, which provides capital structure optionality.

The homebuilding peer group currently trades at 1.4x book value versus Lennar at 1.6x and the new price target offers 13% capital appreciation and a yield of 1% for a potential 14% total return.

The management's 3Q23 guidance, including 17,750 – 18,250 deliveries and orders of 18,000 – 19,000, along with average sales prices of $450,000 is positive, according to the analyst.

After considering 2Q23 results, increased guidance, and management's commentary, the analyst increased 2023 and 2024 EPS estimates to $12.40 & $12.73 from $9.74 & $10.40, respectively.

The analyst remains a buyer of LEN thinking its scale, cash flow, and low leverage should drive shareholder returns.

Price Action: LEN shares are trading higher by 0.44% at $120.34 on the last check Friday.

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