On Wednesday, Wolfe Research revised its rating on Lennar Corporation (NYSE:LEN), moving the home construction company's stock from Outperform to Peer Perform.
According to InvestingPro data, this comes as the stock trades near its 52-week low of $132.83, with five analysts recently revising their earnings estimates downward. The stock currently maintains an analyst consensus rating of 2.33, with price targets ranging from $130 to $205.
The downgrade comes as analysts at Wolfe Research anticipate that the recent increase in interest rates will exacerbate homebuyer affordability issues, which could negatively impact Lennar's gross margins (GM) compared to its competitors.
The research firm points out that Lennar's strategy of prioritizing sales volume over price could lead to a significant reduction in gross margins. Wolfe Research forecasts a 205 basis point (bps) decline in Lennar's GM for the year 2025, to 20.2%. InvestingPro data shows Lennar's current gross margin stands at 22.74%, with the company maintaining a strong overall financial health score of 3.21, rated as "GREAT" by InvestingPro's comprehensive analysis system.
This projected drop is considered one of the steepest year-over-year declines within Wolfe's coverage universe and stands in contrast to the group average decline of 130 bps.
Furthermore, Wolfe Research expects that in 2025, Lennar will also report the lowest Absolute GM, which would be approximately 300 bps below the average of its peer group. With investor focus intensifying on profitability in what is predicted to be a volatile demand environment throughout the year, the anticipated gross margin performance of Lennar is seen as a potential hindrance to the company's stock performance in the near to intermediate term.
This reassessment of Lennar's stock outlook is based on the belief that the housing market may face challenges due to the uptick in interest rates, which tends to make mortgages more expensive and could dampen demand for new homes. Despite these challenges, InvestingPro analysis indicates the stock may be undervalued at its current P/E ratio of 8.99.
InvestingPro subscribers have access to 15 additional key insights about Lennar, including detailed valuation metrics and future growth projections through the comprehensive Pro Research Report.
Lennar's approach of adjusting prices to meet market demand is viewed as aggressive and, according to Wolfe Research, may not bode well for the company's profitability when compared with its peers who may adopt different strategies.
The detailed commentary and the full analysis by Wolfe Research can be found on page 2 of their report, providing additional insights into the factors influencing the downgrade of Lennar's stock rating.
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