Thinking of Selling LEN After Today's Rally? Consider This First.

Lennar (LEN) stock climbed 0.8 % this morning. According to our metrics, the company seems undervalued at today's prices. In the below analysis, we will put Lennar's valuation in the context of its strong growth indicators and positive market sentiment, which are also strong drivers for share price.

Lennar Corporation, together with its subsidiaries, operates as a homebuilder primarily under the Lennar brand in the United States. The large-cap Consumer Discretionary company is based in Miami, United States and has 12,012 full time employees.

LEN's P/E Ratio Is Better Than the Sector Average

Compared to the Consumer Discretionary sector's average of 22.33, Lennar has a trailing twelve month price to earnings (P/E) ratio of 8.1 and an expected P/E ratio of 7.6. P/E ratios are calculated by dividing the company's share price by its trailing 12 month or forward earnings per share, which stand at $13.48 and $14.45 respectively.

Earnings represent the net profits left over after subtracting costs of goods sold, taxes, and operating costs from the company's recorded sales revenue. One way of looking at the P/E ratio is that it represents how much investors are willing to pay for every dollar's worth of the company's earnings. Since Lennar's P/E ratio is lower than its sector average, we can deduce that the market is undervaluing the company's earnings.

Lennar Is Overvalued in Terms of Expected Growth

Lennar's PEG ratio is 13.33. This metric represents the company's earnings per share divided by its expected growth ratio, and is a useful complement to the price to earnings analysis, because it factors in growth to the valuation. A PEG ratio around or below 1 implies that the market in fairly valuing the company in terms of its growth estimates. But when the PEG ratio is higher, as in Lennar's case, it tells us the company is overvalued.

LEN Has an Average P/B Ratio

Traditionally, stock pickers used to focus primarily on finding issues that were trading significantly below their tangible asset value, to guarantee themselves a margin of safety. But such an approach would screen out many valuable securities because many profitable businesses -- especially those that heavily leverage information technology -- simply do not have many tangible assets compared to more capital intensive companies.

Therefore, modern value investors tend to focus less on absolute price to book value (P/B) ratios. Instead of singling out stocks with a P/B ratio of less than 1, they will compare the target company against its peer group. For Lennar, the P/B value is 1.21 while the average for the Consumer Discretionary sector is 3.12.

LEN's Weak Cash Flow Generation Is Troubling

The table below shows that Lennar is not generating enough cash. A well run company will generally have cash flows that reflect the strength of its underlying business, and in Lennar's case, free cash flow is growing at an average rate of 0.0% with a coefficient of variability of 3165092269.8%. We can also see that cash flows from operations are evolving at a 0.0% rate, versus 0.0%:

Date Reported Cash Flow from Operations ($ k) Capital expenditures ($ k) Free Cash Flow ($ k) YoY Growth (%)
2023-01-26 3,265,668 -32,528 3,298,196 29.02
2022-01-28 2,532,774 -23,621 2,556,395 -41.16
2021-01-22 4,305,994 -38,818 4,344,812 191.69
2020-01-27 1,482,343 -7,190 1,489,533 -15.81
2019-01-08 1,691,747 -77,584 1,769,331 71.74
2018-01-09 982,374 -47,837 1,030,211

Lennar Is Not a Profitable Business

If you are looking to make LEN a long term investment, its weak margins may give you cause for concern. As you can see from the below, the company is generally losing money on each sale it makes. That being said, stock prices in the short term can be independent of a company's margins, and Lennar's management may be able to make the business profitable in the future.

Lennar's Gross Margins

Date Reported Revenue ($ k) Cost of Revenue ($ k) Gross Margins (%) YoY Growth (%)
2023-01-26 33,671,010 -26,468,866 21 5.0
2022-01-28 27,130,676 -21,594,037 20 33.33
2021-01-22 22,488,854 -19,014,746 15 15.38
2020-01-27 22,259,561 -19,457,266 13 8.33
2019-01-08 20,571,631 -18,121,477 12 -7.69
2018-01-09 12,646,365 -11,021,481 13

Lennar's Operating Margins

Date Reported Total Revenue ($ k) Operating Expenses ($ k) Operating Margins (%) YoY Growth (%)
2023-01-26 33,671,010 -414,498 20 5.26
2022-01-28 27,130,676 -398,381 19 35.71
2021-01-22 22,488,854 -333,446 14 27.27
2020-01-27 22,259,561 -321,188 11 10.0
2019-01-08 20,571,631 -459,903 10 0.0
2018-01-09 12,646,365 -344,751 10

Lennar's cost of revenue is growing at a rate of -0.0% in contrast to -3.1% for operating expenses. Sales revenues, on the other hand, have experienced a 0.0% growth rate. As a result, the average gross margins growth is 0.3 and the average operating margins growth rate is 12.4, with coefficients of variability of 24.8% and 32.3% respectively.

Lennar Benefits From Positive Market Signals

The market sentiment regarding Lennar is overwhelmingly positive. The stock has an average rating of buy and target prices ranging from $164.0 to $112.0. LEN is trading -22.19% away from its target price of $140.5. 3.0% of the company's shares are tied to short positions, and 91.2% of the shares are held by institutional investors.

Date Reported Holder Percentage Shares Value
2023-06-30 Vanguard Group Inc 11% 28,126,909 $3,075,115,012
2023-06-30 Blackrock Inc. 9% 21,740,486 $2,376,887,374
2023-06-30 Wellington Management Group, LLP 5% 13,565,922 $1,483,162,277
2023-06-30 Capital World Investors 5% 12,870,505 $1,407,132,335
2023-06-30 Aristotle Capital Management, LLC 5% 11,661,805 $1,274,985,162
2023-06-30 State Street Corporation 5% 11,439,644 $1,250,696,299
2023-06-30 FMR, LLC 4% 10,980,063 $1,200,450,307
2023-09-30 Greenhaven Associates, Inc. 4% 8,982,250 $982,029,408
2023-06-30 Manufacturers Life Insurance Co. 2% 6,177,362 $675,370,998
2023-06-30 Geode Capital Management, LLC 2% 5,466,631 $597,666,777
The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.