Warren Buffett-backed Lennar reported better-than expected fiscal third-quarter earnings and revenue late Thursday, buoyed by increased home deliveries as the new-home housing market remains hot. LEN stock sank Friday.
The luxury homebuilder surprised analysts Thursday, with Q3 profit falling less than predicted. Meanwhile, the broader homebuilder stock group is at a critical juncture.
The stocks rallied aggressively through the first half of the year, as rising interest rates slowed sales of existing houses, driving up demand and prices for newly built homes.
The Building-Residential/Commercial industry group ranks a lofty No. 16 out of 197 groups tracked by IBD. Homebuilder stocks collectively have advanced more than 37% so far in 2023.
During that run-up, Warren Buffett's Berkshire Hathaway bet on the supply-constrained U.S. housing market. Berkshire reported last month that, during Q2, it opened new positions in S&P 500 stocks Lennar, D.R. Horton and NVR worth a total of more than $800 million.
Lennar stock angled down 2.5% to 114.78 Friday. On Thursday, advanced 1.5% to 117.71 Thursday during regular market trade. On Wednesday, the S&P 500 component edged down 0.5% to 115.97.
The new Warren Buffett stock is down 1.4% in September. Ahead of Q3 earnings, LEN has gained 26% in 2023, outperforming the broader S&P 500 index.
Warren Buffett: Lennar Earnings
Estimates: Wall Street forecast Lennar earnings would fall 30% to $3.52 per share with revenue declining 5% to $8.49 billion. Analysts predicted 18,192 Lennar homes delivered during the quarter.
Results: Lennar earnings dropped 23% to $3.87 per share with revenue falling nearly 3% to $8.73 billion.
LEN earnings decelerated in recent quarters from a 59% jump in Q2 last year. Revenue gains have also slowed from 30% growth in the second quarter last year.
The company's average sales price per home delivered in Q3 was $448,000, compared to nearly $500,000 last year. Lennar reported this was primarily due to lower market pricing and product mix.
Meanwhile, deliveries increased 8% to 18,559 homes with new orders jumping 37% to 19,666 homes, totaling $8.6 billion. The Miami-based Lennar also reported that its backlog at the end of fiscal Q3 was 21,321 homes, worth $9.9 billion.
Co-Chief Executive Officer Stuart Miller said in the earnings release that "market conditions remained constructive for new homebuilders during our third quarter, as the Fed continued to use tighter money supply and higher interest rates as tools to battle inflation, while enabling continued economic growth."
"Short housing supply, absorbed by strong primary and pent-up demand, continued to define a strong sales environment," Miller added.
Looking ahead, Lennar expects to deliver between 21,500-22,500 homes in Q4 with a gross margin between 24.4%-24.6%. The company also expects the average price per delivered home to be consistent with Q3.
On Monday, Citi analyst Anthony Pettinari lowered the price target on the Warren Buffett stock to 139, down from 148. Pettinari maintained a buy rating on Lennar stock as he remains "selectively positive" on U.S. homebuilders, citing "historically attractive" valuations, low inventories and secular share gain tailwinds.
Homebuilder Stocks
Homebuilding stocks have now paused for almost nine weeks. That has left some, like Toll Brothers, NVR and M/I Homes in viable base patterns.
From here, the rally could resume and stocks could move higher. But heavy price incentives and other perks used to lure homebuyers into new homes could begin to take a toll, sending homebuilder earnings and stocks south.
U.S. Housing Market
Meanwhile, the big picture in the U.S. is that of a long-term housing shortage. The construction of new homes has not kept pace with the growing population. Rising material costs, supply-chain issues and labor shortages since the Covid pandemic have exacerbated the issue.
The shortage is currently running at a deficit of about 5.5 million homes, according to the National Association of Realtors (NAR). The gap is so large it would take more than a decade to close, NAR says, even if new-home construction accelerates.
That points to a bullish long-term view for homebuilders. Warren Buffett backed that view with Berkshire's Q2 bets on the U.S. housing market.
The National Association of Realtors on Aug. 22 reported existing-home sales fell 2.2% in July, down nearly 17% vs. 2022, to a seasonally adjusted annual rate of 4.07 million. Meanwhile, the median existing-home sales price rose 1.9% from a year ago to $406,700.
In July, new-home sales grew following a drop in June, according to Commerce Department data. Sales of new single‐family houses in July were at a seasonally adjusted annual rate of 714,000, up 4.4% compared to June and an increase of 31.5% vs. July 2022.
Prices remained strong and demand steady as high mortgage rates left owners of existing homes holding tight — not wanting to sell and move up into more expensive mortgages. The key determinant of interest rates for mortgages is the federal funds target rate set by the Federal Reserve. This rate determines the overnight lending rate among U.S. banks.
The Fed, attempting to cool rapidly rising inflation, has repeatedly raised its target interest rates since the beginning of 2022. Higher interest and mortgage rates tend to reduce housing demand, which theoretically should help dampen inflation. Higher interest rates also help keep the supply of existing homes low.
The S&P 500 stock has an 86 Composite Rating out of 99. The Warren Buffett stock also has a 90 Relative Strength Rating. The EPS Rating is 72.
Please follow Kit Norton on X, formerly known as Twitter, @KitNorton for more coverage.
YOU MAY ALSO LIKE:
Get An Edge In The Stock Market With IBD Digital
Labor Unions Keep The Heat On Starbucks And Amazon
