Standing out among the Street's worst performers today is Lennar, a residential construction company whose shares slumped -4.8% to a price of $150.32, 6.57% below its average analyst target price of $160.89.
The average analyst rating for the stock is buy. LEN underperformed the S&P 500 index by -4.0% during today's morning session, but outpaced it by 30.3% over the last year with a return of 51.7%.
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 figures depend on discretionary income levels in its consumer base. For this reason, consumer cyclical companies have better sales and stock performance during periods of economic growth, when consumers have more of an incentive to spend their money on non-essential items.
Lennar's trailing 12 month P/E ratio is 11.0, based on its trailing EPS of $13.72. The company has a forward P/E ratio of 9.3 according to its forward EPS of $16.09 -- which is an estimate of what its earnings will look like in the next quarter. As of the first quarter of 2023, the average Price to Earnings (P/E) ratio for US consumer discretionary companies is 22.96, and the S&P 500 has an average of 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (EPS), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.
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 18.23, 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.
To deepen our understanding of the company's finances, we should study the effect of its depreciation and capital expenditures on the company's bottom line. We can see the effect of these additional factors in Lennar's free cash flow, which was $5.22 Billion as of its most recent annual report. Over the last 4 years, the company's average free cash flow has been $3.0 Billion and they've been growing at an average rate of 28.7%. With such strong cash flows, the company can not only re-invest in its business, it can afford to offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in LEN have received an annualized dividend yield of 0.9% on their capital.
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 1.59, but is still below the average P/B ratio of the Consumer Discretionary sector, which stood at 4.24 as of the first quarter of 2023.
Lennar is likely overvalued at today's prices because it has a Very low P/E ratio, a lower P/B ratio than its sector average, and generally positive cash flows with an upwards trend. The stock has poor growth indicators because of its decent operating margins with a stable trend, and an average PEG ratio. 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.
