By Andrew Bary
Lennar is one of the two largest home builders in the country, and its stock trades at a discount. Investors might want to buy this fixer-upper.
Housing stocks are hurting this year due to soft sales -- a reflection of continued affordability issues and flagging consumer confidence. A recent uptick in mortgage rates and the Iran war aren't helping. New single-family home sales fell nationally to their lowest level in 3 1/2 years in January.
Lennar has been hit harder than most. Its Class A stock dropped 25%, to $86, over the past year, far worse than the iShares U.S. Home Construction exchange-traded fund, which has fallen about 5%. A cheaper way to play Lennar is through its lightly traded supervoting Class B shares, which fetch about $83.
The stock market is underselling Lennar, which has an excellent balance sheet. Its book value -- now about $89 a share -- should help provide a floor under the stock, and there is appreciation potential if its margins and profits rise. The stock traded at nearly $200 in late 2024. Bill Smead, co-manager of the Smead Value fund, says strong dynamics keying off a national shortage in single-family homes and favorable demographics should power both earnings and the stock.
"Lennar should do really well over the next five to 10 years," he predicts.
The problem has been the past five years. Lennar stock has gone nowhere, while Toll Brothers and PulteGroup have returned an annualized 20%. Industry leader D.R. Horton has returned an annualized 10%.
Lennar has only itself to blame. The company, which has scale in major Sunbelt markets and a focus on entry-level homes, has sacrificed earnings to maintain volume, and its profit margins have suffered as demand has weakened. Incentives as a percentage of sales prices were over 14% in the latest quarter, compared with a more normal 5%.
That was evident in Lennar's fiscal first quarter ended in February. The company's adjusted earnings excluding investment gains were 88 cents a share, down almost 60% year over year and below the consensus estimate of 95 cents.
Lennar CEO and controlling shareholder Stuart Miller acknowledged what he called "intensified" challenges for the company on its first-quarter earnings call on March 13.
Lennar -- which had an average selling price of $374,000 in the latest quarter -- has staying power thanks to a solid balance sheet, with net debt of $2 billion against a market value of $21 billion. The company bought back 8% of its stock in its fiscal year ended in November and carries a 2.3% dividend yield.
"Lennar offers a significant margin of safety and material upside when the operating environment inevitably normalizes," says Larry Pitkowsky, manager of the GoodHaven mutual fund. ( Ryan Dobratz of the Third Avenue Real Estate Value Fund also likes the stock. )
Lennar's stock doesn't look like a bargain based on profits. The company is expected to earn about $6 a share this year, resulting in a price/earnings ratio of about 14 -- above the average for the group.
Current earnings are depressed, Pitkowsky says, and the company is capable of $15-plus a share in annual profits -- in line with what it earned in 2024. The company earns less than half of what Horton does, even though it builds about the same number of homes -- roughly 85,000 a year -- and has similar annual revenue of $34 billion.
CEO Miller is optimistic. The company is streamlining its home-building construction using better building techniques, fewer floor plans, and other improvements. This has cut the number of days to complete a new home by 11%, to 122, over the past year. He said on the call that Lennar is "closer to an inflection point than at any time in the past three years."
And Lennar has moved to boost returns and reduce risk by spinning off the bulk of its land holdings last year to shareholders in a new company, Millrose Properties. The Millrose spinoff, however, has its critics.
A main knock is cost. Lennar pays Millrose an 8.5% interest rate to hold its land. Hunterbrook Media, an investigative news site, highlighted the land-banking issue in a critical report on Lennar this past week.
Before that report appeared, the company defended its strategy in a statement this past Monday. Lennar said that it was "confident in the accuracy of our financial statements" in what it called a response to information sought from analysts and investors about its "land light" and "volume-prioritized operating strategy."
Investors reacted negatively, and the stock fell 6% on Monday to $85, about where it now trades.
Lennar capitalizes the interest expense of the land banking program, and that cost then gets embedded in Lennar's margins as homes are sold, which is permissible under GAAP accounting. KBW analyst Jade Rahmani wrote that the Lennar strategy results in added costs to the company but are "largely factored" into his earnings estimates.
Even before the land-banking controversy, Wall Street was cool to the Lennar story -- there are only three Buy recommendations among the 21 analysts covering the stock tracked by Bloomberg.
One believer is Berkshire Hathaway, which owns seven million shares, for a 3% stake in Lennar. Berkshire knows the business well as the owner of Clayton Homes, the leader in manufactured housing.
Smead says that Lennar would be a great acquisition for Berkshire if the controlling Miller family, which founded Lennar in Miami in 1954, is willing to sell. Berkshire could easily afford it.
Lennar needs to do a better job of explaining its strategy and delivering better results for shareholders, but there is nothing fundamentally wrong with the business. For investors, a discounted stock price, market leadership, and depressed margins offer a nice combination to build on.
Write to Andrew Bary at andrew.bary@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
April 03, 2026 08:00 ET (12:00 GMT)
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