Lennar is one of the largest home builders in the US
The company trades at a modest P/E of 7
Fourth quarter earnings, reported on December 15, slightly lagged analysts' expectations
Wall Street Analysts' Consensus Outlook Remains Bullish
The view from the options market is neutral until mid-2022 and turns slightly bearish until early 2023
Residential real estate is in the midst of a major bull run, with US home prices increasing by an average of 19.5% over the past year.
a number of factors, including an increase in the number of millennials buying homes, something helped by record-low interest rates. COVID has also boosted demand, as people who worked and recreate in or near their homes – while spending on restaurants and travel fell – sought more space and often less crowded locations.
This increased demand from buyers has benefited homebuilder Lennar Corporation (NYSE:), despite the company having faced headwinds from increased labor costs, inflation in building materials and supply chain disruptions.
Source: Investing.com
LEN has a lagging 12-month total return of 43.9% and a 3-year total return of 43% per annum. However, the housing sector is cyclical and recent years have been strong. The annualized total return over 10 and 15 years is 19.7% and 5.9% per annum, respectively.
The company reported strong results in 2021. The fourth quarter was relative compared to expectations that were too high. The fourth quarter earnings estimate of $3.91 per share was very high compared to previous years, surpassed only by third quarter results. Trade
Real assets tend to perform well when inflation is rising, benefiting homebuilders. The Fed is also likely to respond to ongoing inflation by raising interest rates, pushing monthly payments above purchase prices, which tends to put downward pressure on prices.
Rising interest rates are also increasing payments for homeowners with adjustable-rate mortgages (ARMs) and home equity lines of credit (HELOCs).
I last analyzed LEN on May 17, 2021, about 7-½ months ago, at which point I assigned a bullish rating to the stock. The same fundamentals played a role in May.
The second half of 2021 was favorable for LEN, with the Fed managing market expectations to avoid major shocks. prices have fallen significantly from their May high. Since my post in May, LEN has delivered a total return of 14.8%, compared to 14.5% for the . The first is the well-known consensus outlook from Wall Street analysts, which turned bullish in May. The second, the market implicit view, is the consensus view of buyers and sellers of options on LEN.
fall above (call option) or below (put option) a certain level (the option's strike price) between now and when the option expires. By analyzing the prices of call and put options on a series of strikes, all with the same expiration date, it is possible to calculate a probabilistic price prediction that aligns option prices. outlook for early 2022 was neutral. With LEN's strong performance, reasonable valuation, a bullish view of Wall Street and a neutral view of the options market, I have generally assigned a bullish rating. look at mid-2022 and early 2023 and compare it to the Wall Street consensus outlook for the coming year.
Wall Street Analyst Consensus Outlook for LEN
E-Trade calculates the Wall Street- consensus outlook for LEN by pooling the views of 12 ranked analysts who have published ratings and price targets in the past 90 days. The consensus rating is bullish and the 12-month consensus price target is 17.1% above the current share price.
Of the 12 analysts, 9 are recommending a buy and 3 a hold. One potential concern is that there is a fairly high degree of dispersion between the price targets, which diminishes confidence in the predictive value of the consensus. analysis, at which point the consensus price target for 12 months was 12.9% above the stock price. Trade
Investing.com's version of the Wall Street analyst consensus is based on ratings and price targets of 17 analysts and the results are very similar to those of E-Trade. The consensus rating is bullish and the consensus price target for 12 months is 17.7% above the current share price. Source: Investing.com
The two analyst consensus calculations match, overall bullish rating and expected 12-month price increase of about 17.4%. Combined with the future dividend yield of 0.9%, the consensus forecast for the expected total return is 18.3% for the coming year. This is in line with the 10-year lagging return, but significantly less than the past three-year return. for LEN for the next 4.8 months using options expiring on May 20, 2022 and for the next 12.8 months using options expiring on January 20, 2023. I have selected these two expiration dates because they are closest to the mid and late 2022.
The standard presentation of the market implied outlook is in the form of a probability distribution of price return, with probability on the vertical axis and return on the horizontal.
Market implied probability of price return for LEN, 4.8 month period the peak probability is slightly more favorable for negative returns. The annualized volatility calculated from this breakdown is 35.2%, quite high for an individual stock. This distribution gives a 1 in 5 chance that LEN will lose 17% or more in the next 4.8 months and a 1 -in-5 chance that LEN will gain 17% or more in the same period. vertical axis (see chart below). shows how well the probabilities of positive and negative returns of the same magnitude match (the solid blue line and the dotted red line are very close to each other), although the probabilities of negative returns are slightly higher for the higher probability outcomes (left third of the above chart).
Theory suggests that market-implied outlook tends to be negative because investors are generally risk averse and thus tend to pay more than fair value for downside protection. Given the potential for such bias, the market implied outlook for the next 4.8 months looks neutral to slightly bullish. strongly supports negative returns (the red dotted line is well above the solid blue line for the range of possible outcomes). This is a somewhat bearish outlook. The annualized volatility calculated on the basis of this distribution is 37.6%.
Market-implied LEN price return probabilities, 12.8 month period
Note: The negative return side of the distribution is rotated about the vertical axis (Source: Author's calculations using option quotes from E -Trade)
The market implied outlook for the middle of 2022 is neutral to slightly bullish and shifts to slightly bearish for the outlook through early 2023. Expected annualized volatility is 35.2% for the semi-annual outlook and 37 .6% for the full year. This is in line with growing concerns about rising interest rates as the year progresses.
Summary
Lennar has done very well in recent years. A number of factors are geared to boost demand for homes.
The prevailing low interest rates and, more recently, COVID have been very good for homebuilders. With inflation rising and the Fed signaling a less accommodative stance for 2022, along with record high real estate prices in many US cities, the potential for a market slowdown is increasing. next year will remain bullish, with an expected 12-month total return of around 18.3%. Even with the uncertainties reflected in the high expected volatility, this is an attractive return.
As a rule of thumb for a purchase, I look for a 12 month expected return of at least ½ the expected annualized volatility. LEN only just manages to meet this criterion. The market implied outlook for LEN is neutral to slightly bullish in the first half of 2022, but shifts to slightly bearish for the full year. Given the modest valuation of LEN, the current economic conditions and the two types of consensus outlook, I maintain my optimistic view on LEN for now. I plan to revisit this analysis in mid-2022, given the uncertainty in interest rates and the shift in the market-implied outlook to slightly bearish for the full year.
