Yahoo Finance Here's Why Investors Should Steer Clear of Lennar (LEN) Now
Lennar Corporation LEN shares have dropped 25.6% this year, almost in line with the Zacks Building Products - Home Builders industry’s 26.1% decline. The overall industry has been grappling with supply chain disruptions and labor and raw material shortages. Rising inflation — particularly for materials and transportation — the Fed’s back-to-back interest rate hikes and affordability issues are adding to the woes.
Although Lennar has undertaken various price actions and cost-saving moves, they are facing lower demand and project delays.
Analysts are pessimistic about LEN’s near-term prospects, as evident from the recent estimate revision trend. Earnings estimates for fiscal 2022 and 2023 have fallen in the past two months. For 2022, earnings estimates reflect a 22.3% improvement on a 24.4% revenue increase. For 2023, the situation is likely to worsen, evident from 27.9% earnings decline over 2022 for a 7.9% revenue decrease.
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Let’s check the factors that suggest that investors should sell LEN — carrying a Zacks Rank #4 (Sell). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
What Makes Lennar a Sell-Rated Stock?
Fed’s Back-to-Back Interest Rate Hikes to Deal With Inflation
The housing industry is cyclical and affected by consumer confidence levels, prevailing economic conditions and interest rates. Currently, the Fed's determination to curtail inflation through interest rate increases and quantitative tightening has started to show the desired effect of slowing down sales in some markets across the country.
In September, the Fed approved its third consecutive interest-rate rise of 0.75 percentage points. It signaled that additional large increases were likely at upcoming meetings as it combats inflation that remains near a 40-year high. The rate hike brings the central bank’s benchmark interest rate, the federal funds rate, to a new range of 3.0% to 3.25% — its highest level since 2008 — from a range between 2.25% and 2.5%. Officials expect the Fed funds rate to rise to 4.4% by the end of 2022 and 4.6% by the end of 2023. Hence, it increased by 3.4% this year and 3.8% previously.
This has significantly impacted the housing sector by nearly 7% in mortgage rates. Interest rate hikes, soaring inflation and a smaller bond-buying program are hitting the affordability of prospective buyers.
Near 7% Mortgage Rates Hurt Buyers’ Intentions
The interest-rate-sensitive housing sector in the United States has been dented by the rising mortgage rates as the Fed made a move to curb the inflation by lifting borrowing costs.
The recent Freddie Mac’s Primary Mortgage Market Survey shows that the 30-year fixed mortgage rate has gone up to 6.58% for the week ending Nov 23. The rate has moved up by 3.48 percentage points in the past year.
Low Orders & Backlogs
Due to lower demand from higher mortgage interest rates, inflation and other macroeconomic and geopolitical concerns, LEN experienced a year-over-year decline in net orders and backlog during the fiscal third quarter.
In the fiscal third quarter, new orders declined 12% from the year-ago quarter to 14,366 homes. The potential value of net orders also decreased 11% year over year to $6.7 billion. Backlog at the fiscal third-quarter end declined 0.3% from a year ago to 25,734. Potential housing revenues from backlog advanced 8% year over year to $12.89 billion.
For the fiscal fourth quarter, it expects new orders to be between 14,000 and 15,500 units, and the ASP is expected to be between $475,000 and $480,000. In the prior year, 15,539 units for an ASP of $469,000.
Key Picks
Some better-ranked stocks that warrant a look in the same Zacks Construction sector include Atlas Technical Consultants, Inc. ATCX, Altair Engineering Inc. ALTR and EMCOR Group Inc. EME, each carrying a Zacks Rank #2 (Buy).
Atlas Technical, an Austin, TX-based company, provides professional testing, inspection, engineering, environmental and program management and consulting services in the United States. The company’s record backlog and robust new award pipeline reflect the business’ prospects. ATCX has become one of the largest providers of mission-critical technical services for infrastructure and environmental markets in the United States.
ATCX’s expected earnings growth rate for 2023 is 76.9%.
Altair Engineering provides software and cloud solutions in simulation, high-performance computing, data analytics and artificial intelligence worldwide.
ALTR’s expected earnings growth rate for 2023 is 21.5%.
Headquartered in Norwalk, CT, EMCOR provides electrical and mechanical construction and facilities services in the United States. EMCOR has been benefiting from solid execution in the U.S. Construction segment — comprising the U.S. Mechanical and Electrical Construction units — as well as disciplined cost control. Also, accretive buyouts have been strengthening its overall results by adding new markets, opportunities and capabilities.
EMCOR’s 2022 and 2023 are expected to grow 10.2% and 17%, respectively.
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