On Friday, BTIG changed its stance on Lennar Corporation (NYSE:LEN), shifting the rating from Buy to Neutral and eliminating the previous $216 price target. The downgrade follows Lennar's fourth-quarter earnings per share (EPS) miss and the first-quarter 2025 EPS guidance, which was set 31% below the prior consensus.
The firm's revised outlook is influenced by several factors, including a reassessment of the value of the Millrose spin-off and the company's current fair valuation based on new, lower EPS estimates.
Lennar's performance in the last quarter indicated a departure from its usual business efficiency, with the company failing to meet its guidance targets.
Management's strategy to adjust prices and incentives did not resonate with consumers, leading to a forecast that an 18% gross margin will be necessary to achieve sales goals for homes sold and closed in the first quarter.
This shift introduces additional uncertainty regarding the company's sales volumes and profit margins for the fiscal year 2025, prompting BTIG to reduce its EPS estimate for Lennar to $12.35 from $16.35.
The analysis also casts doubt on the potential for Lennar's "asset-light" approach to significantly enhance its market multiple in the short term. Market participants may remain skeptical about the company's volume-first strategy, especially when competitors are adopting less risky land acquisition methods and prioritizing margin improvement to boost return on equity. In contrast to Lennar's strategy, these peers are slowing growth to focus on profitability.
Despite the downgrade at a time when Lennar's stock is at a year-low, BTIG acknowledges the company's large scale, ability to generate cash, and strong balance sheet. The firm maintains long-term confidence in Lennar's potential for higher returns.
However, the immediate challenges and uncertainties overshadow these positive aspects, leading to the conclusion that other builders may offer a more attractive combination of price points, sales, margin visibility, and potential upside at comparable or more favorable valuations.
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