Lennar Earnings: Order Growth Returns, Cancellations Normalizing, Delivery Guidance Raised

Lennar’s LEN fiscal second-quarter financial results exceeded our expectations as the homebuilder’s pricing actions have been well received by the marketplace. These pricing actions caused the average selling price of new orders to decline 11% year over year (to $457,000), but in return, new order growth returned (0.5% growth after a 10% year-over-year decline last quarter), and the firm’s order cancellation rate is normalizing (13.5% during the second quarter compared with 21.5% last quarter and 26% during fourth-quarter 2022). Management is targeting 18,000-19,000 new orders during the third quarter, or 25%-32% year-over-year growth.

While Lennar’s pricing actions have compressed home sales gross profit margin, the homebuilder is making good progress offsetting these headwinds with reduced construction costs by renegotiating with suppliers and finding more value engineering opportunities. Second-quarter home sales gross margin was 22.5%, down from 29.5% last year, but 130 basis points better than first quarter’s 21.2%. Management sees third-quarter gross margin improving to 23.5% to 24% as costs savings become more meaningful.

Emboldened by a successful spring selling season and dearth of for-sale inventory in the existing market, Lennar is ratcheting up construction starts. Management expects second-half starts will exceed 2022 levels. We suspect a lot of other homebuilders (especially smaller ones that are dealing with tightening lending standards) won’t be as aggressive, so Lennar’s strategy could lead to market share gains. Lennar now expects to deliver 68,000-70,000 homes in fiscal 2023, up from previous guidance of 62,000-66,000. In 2022, Lennar delivered 66,399 homes.

We’ve increased our fair value estimate 11% to $133 per share (1.5 times estimated 2024 book value). Our new fair value estimate assumes stronger near-term financial performance and gives Lennar more credit for better long-term SG&A expense management.