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Lennar’s stock price has taken a beating over the past six months, shedding 34.4% of its value and falling to $110.77 per share. This may have investors wondering how to approach the situation.
Is now the time to buy Lennar, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think Lennar Will Underperform?
Despite the more favorable entry price, we're sitting this one out for now. Here are three reasons why there are better opportunities than LEN and a stock we'd rather own.
1. Backlog Declines as Orders Drop
In addition to reported revenue, backlog is a useful data point for analyzing Home Builders companies. This metric shows the value of outstanding orders that have not yet been executed or delivered, giving visibility into Lennar’s future revenue streams.
Lennar’s backlog came in at $5.77 billion in the latest quarter, and it averaged 22.1% year-on-year declines over the last two years. This performance was underwhelming and shows the company is not winning new orders. It also suggests there may be increasing competition or market saturation.
2. EPS Took a Dip Over the Last Two Years
While long-term earnings trends give us the big picture, we also track EPS over a shorter period because it can provide insight into an emerging theme or development for the business.
Sadly for Lennar, its EPS declined by 10.8% annually over the last two years while its revenue grew by 2.7%. This tells us the company became less profitable on a per-share basis as it expanded.
3. Free Cash Flow Margin Dropping
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, Lennar’s margin dropped by 13.3 percentage points over the last five years. If its declines continue, it could signal increasing investment needs and capital intensity. Lennar’s free cash flow margin for the trailing 12 months was 4.5%.
Final Judgment
We cheer for all companies making their customers lives easier, but in the case of Lennar, we’ll be cheering from the sidelines. After the recent drawdown, the stock trades at 8.7× forward P/E (or $110.77 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better investments elsewhere. Let us point you toward the Amazon and PayPal of Latin America.
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