Lennar Stock Slides After Earnings Miss. Rising Mortgage Rates Were an Issue. -- Barrons.com

Shaina Mishkin

Lennar shares were down about 8% in after-hours trading after the home builder missed fourth-quarter and full-year earnings expectations.

Lennar, one of the nation's largest home builders by market capitalization, said it earned $4.06 a share, or $4.03 excluding mark-t0-market gains on its technology investments, on $9.9 billion in revenue in the quarter. That fell short of expectations that called for $4.15 a share on about $10 billion in sales, according to FactSet.

For the year, Lennar earned $14.31 a share on $35.4 billion in revenue, missing expectations for $14.41 a share, though the full-year revenue slightly beat expectations.

The housing market "proved to be far more challenging" in the quarter than it first appeared, Stuart Miller, Lennar's executive chairman and co-CEO, said in a statement, citing rising mortgage rates.

"Accordingly, in our fourth quarter, sales pace lagged expectations as interest rates climbed," he said. "We continue to remain focused on our volume-based strategy of driving sales and cash flow while using margin as a shock absorber as we continue to migrate to an asset-light, land-light business model."

The company expects to deliver homes in a range from 17,000 to 17,500 in its first quarter, and 86,000 to 88,000 in 2025. Analysts expected 16,801 deliveries in the first quarter and 86,671 for the year, according to FactSet. Its gross margin will be between 19% and 19.25% in the first quarter, Miller said.

The earnings report added to the pain of builders at large. The iShares U.S. Home Construction exchange-traded fund, which follows builders and related companies, was down about 1.5% in after-hours trading, after closing about 4.1% lower. The shares dropped with the broader market after the Federal Reserve said earlier that it foresees fewer rate cuts in 2025 than it did previously. The 10-year Treasury yield -- a benchmark for mortgage rates -- rose.

Industry sentiment remained pessimistic in December, according to a National Association of Home Builders index published Tuesday. Builders were overall gloomy about current sales conditions and the traffic of prospective buyers -- but they were significantly more optimistic about sales expectations over the next six months. That metric rose to its highest level since April 2022.

Builders are concerned about familiar industry headwinds, such as high interest rates, construction costs and a lack of buildable lots, the trade group said. But "they are also anticipating future regulatory relief in the aftermath of the election," Carl Harris, the National Association of Home Builders' chairman, said in a statement. "This is reflected in the fact that future sales expectations have increased to a nearly three-year high."

A team of Barclays analysts downgraded a slate of builders including Lennar earlier this month to Equal Weight from Overweight, citing expectations for flat home prices, the continued use of incentives to entice buyers, and growing land and labor costs that could drag on builders' margins.

"Following two years of relative stock outperformance and an unprecedented market recovery that has occurred in spite of high rates and challenged affordability, we believe the new construction market has now hit a ceiling," wrote the team led by Matthew Bouley. "Indeed, the journey to the 'utopia' of lower interest rates with a still-healthy macro is fraught with obstacles in 2025, and we think a reset to earnings estimates and valuations is necessary to become more positive on the builder group again."

Investors can expect more context about the company and broader housing market on Thursday. The National Association of Realtors will release November's existing-home sales report at 10 a.m. ET, and Lennar will discuss its results on a conference call at 11 a.m.

Write to Shaina Mishkin at shaina.mishkin@dowjones.com

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December 18, 2024 17:18 ET (22:18 GMT)

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