Lennar outlook strengthens amid acceptance of new normal Lennar outlook strengthens amid acceptance of new normal Lennar outlook strengthens amid acceptance of new normal

Lennar outlook strengthens amid acceptance of new normal

Equities 3 minutes to read
Peter Garnry

Head of Equity Strategy

Summary:  Lennar excited investors last night with a much stronger than estimated new orders outlook as the US consumer remains confident about the future and has accepted the new normal on interest rates. The strong underlying demand for new homes in the US is driven by a decade long production deficit which has led to a chronic supply shortage.

Key point in this equity note:

  • Lennar announces strong outlook for new orders smashing estimates in a signal that demand is accelerating again despite worries of high interest rates.

  • US homebuilders will continue to see strong demand in the years to come as a decade of production deficits have caused a chronic supply shortage.

Strong outlook for new orders

The US homebuilder Lennar reported last night FY23 Q2 results (ending 31 May) with revenue at $8bn vs est. $7.3bn and adjusted EPS of $2.91 vs est. $2.31 driven by strong execution and a strategy of offering more affordable houses amid higher interest rates. Lennar published Q3 outlook on new orders in the range 18-19,000 vs est. 15,700 as demand is beginning to accelerate again as the consumer has come to accept the “new normal” in terms of financing conditions for housing. Investors were excited about the outlook sending Lennar shares up 2% in extended trading.

While revenue is expected in the current fiscal year to land around $29.7bn down from $33.7bn the year before, the share price is hovering around all-time highs suggesting the equity market is bullish on the outlook for US homebuilders. Lennar has zero net debt and a forward expected free cash flow yield around 6% suggesting a balanced valuation against the economic backdrop. New orders in Q2 hit 17,812 which was a new record highlighting the strength in the US economy.

Lennar share price | Source: Saxo
Lennar quarterly new orders | Source: Bloomberg

Lack of inventory keeps the market sound

US homebuilders have been an interesting observation over the past 18 months. From late 2021 to mid-2022 the initial interest rate shock drove down US homebuilders more than the market as investors feared that the industry would be pushed into a tough environment. However, by early October 2022 the market stabilised as Lennar saw signs of stabilisation. Since then, US homebuilders including Lennar have outperformed the S&P 500 and the market is back to focusing on the key underlying driver of earnings growth for US homebuilders which is the housing deficit.

Existing inventory of houses for sale has been around 1.12mn homes over the past 12 months which is a 37% reduction from the levels from before the pandemic. A decade of production deficits have pushed the US housing market into a chronic supply shortage which underpins demand for new homes and especially on those with affordable prices.
US homebuilders vs S&P 500 | Source: Bloomberg
US housing inventory | Source: Bloomberg

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