Standing out among the Street's worst performers today is Lennar, a residential construction company whose shares slumped -4.3% to a price of $125.19, 7.72% below its average analyst target price of $135.67.
The average analyst rating for the stock is buy. LEN underperformed the S&P 500 index by -4.0% during today's afternoon session, but outpaced it by 4512.0% over the last year with a return of 5929.6%.
Lennar Corporation, together with its subsidiaries, operates as a homebuilder primarily under the Lennar brand in the United States. The company is a consumer cyclical company, whose sales and revenues correlate with periods of economic expansion and contraction. The reason behind this is that when the economy is growing, the average consumer has more money to spend on the discretionary (non necessary) products that cyclical consumer companies tend to offer. Consumer cyclical stocks may offer more growth potential than non-cyclical or defensive stocks, but at the expense of higher volatility.
Lennar's trailing 12 month P/E ratio is 8.6, based on its trailing EPS of $14.63. The company has a forward P/E ratio of 9.2 according to its forward EPS of $13.59 -- which is an estimate of what its earnings will look like in the next quarter. The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the first quarter of 2023, the consumer discretionary sector has an average P/E ratio of 22.33, and the average for the S&P 500 is 15.97.
To better understand LEN’s valuation, we can divide its price to earnings ratio by its projected five-year growth rate, which gives us its price to earnings, or PEG ratio. Considering the P/E ratio in the context of growth is important, because many companies that are undervalued in terms of earnings are actually overvalued in terms of growth.
Lennar’s PEG is 17.27, which indicates that the company is overvalued compared to its growth prospects. Bear in mind that PEG ratios have limits to their relevance, since they are based on future growth estimates that may not turn out as expected.
An analysis of the company's gross profit margins can help us understand its long term profitability and market position. Gross profits are the company's revenue minus the cost of goods only, and unlike earnings, don't take into account taxes and overhead. Here's an overview of Lennar's gross profit margin trends:
| Date Reported | Revenue ($ k) | Cost of Revenue ($ k) | Gross Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2022-11-30 | 33,671,010 | 23,197,056 | 31.11 | 34.44 |
| 2021-11-30 | 27,130,676 | 20,853,412 | 23.14 | 49.48 |
| 2020-11-30 | 22,488,854 | 19,006,648 | 15.48 | -23.71 |
| 2019-11-30 | 22,259,561 | 17,742,081 | 20.29 | n/a |
- Average gross margin: 22.5 %
- Average gross margin growth rate: 11.3 %
- Coefficient of variability (lower numbers indicating more stability): 29.1 %
We can see from the above that Lennar business is not strong and its stock is likely not suitable for conservative investors.
When we subtract capital expenditures from operating cash flows, we are left with the company's free cash flow, which for Lennar was $3.21 Billion as of its last annual report. This represents the amount of money that is available for reinvesting in the business, or for paying out to investors in the form of a dividend. With its strong cash flows, LEN is in a position to do either -- which can encourage more investors to place their capital in the company. Over the last four years, the company's free cash flow has been growing at a rate of 23.1% and has on average been $2.8 Billion.
Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts). Lennar's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 1.44, but is still below the average P/B ratio of the Consumer Discretionary sector, which stood at 3.12 as of the first quarter of 2023.
Lennar is likely undervalued at today's prices because it has a very low P/E ratio, a lower P/B ratio than its sector average, and consistent free cash flow with an upwards trend. The stock has strong growth indicators because of its average net margins with a positive growth rate, and a PEG ratio of less than 1. We hope this preliminary analysis will encourage you to do your own research into LEN's fundamental values -- especially their trends over the last few years, which provide the clearest picture of the company's valuation.
