After the home builder announced higher selling incentives amid a declining housing market, Lennar Corp.’s shares dropped to their lowest values in more than a year, will continue to cut into profitability.
The good news was that Lennar (LEN) exceeded Wall Street estimates for new orders in the current quarter, revenue, house sales, and fiscal first-quarter earnings.
The bad news is that sales strength is costing something. Interest-rate buydowns and reduced prices, among other incentives to sell homes, are running more than twice what the company defines typical, which resulted in a quarterly loss and a negative view of gross margins, or profitability on home sales.
And now home purchasers are being hampered by a fresh worry.
“Until recently, consumers have been generally confident that they will remain employed and that their compensation is safe,” said Lennar co-Chief Executive Stuart Miller, according a FactSet transcript of the company’s postearnings call with analysts. “But more recently, even that safety has been called into question; wavering consumer confidence has challenged the consumer’s desire and ability to transact.”
That supports current statistics from government-sponsored mortgage backer Fannie Mae showing consumers’ personal financial circumstances are causing increased concern.
In afternoon trading, Lennar’s shares dropped 3.9% to put it on route for the lowest closing since Nov. 9, 2023.
Other home builders’ shares suffered as well from that weakness. Friday’s 1.7% dip in the iShares U.S. Home Construction ETF ITB resulted from 42 of its 46 stock component losses ground. Now trading roughly 27% below its October 18 record closing, the ETF
Lennar says it delivered 17,834 homes and booked new orders for 18,355 units for the first quarter ended Feb. 28. Both exceeded the average projections of analysts FactSet polled on delivery of 17,262 homes and new orders of 17,686 homes.
From a year ago, the average sales price dropped 1% to $408,000 per house, falling short of the FactSet expectation of $412,970 per house.
From 21.8% a year ago, that dropped gross margin to 18.7% below the FactSet estimate of 19.1%.
The inadequate margins result from incentives running at 13%, which reduced 13% the real price supplied.
“These are outsized for the moment; normalised incentives should be around 5% to 6%,” Lennar’s Miller advised.
Lennar projects 19,500 to 20,500 homes for its current fiscal second quarter, around the FactSet analyst estimate of 20,033 homes.
Profitability will still be a challenge, though, “as we continue to price to market to meet affordability,” Chief Financial Officer Diane Bessette noted.
From $426,000 a year ago, the average sales price per home is predicted to drop to $390,000 to $400,000 below the current FactSet estimate of $411,240. And from 22.6% a year ago and below current projections of 19.5%, gross margin is likely to drop to roughly 18%.
From $719.3 million, or $2.57 a share, a year ago, the company also stated first-quarter net income that dropped to $510.5 million, or $1.96 a share. The FactSet average was for $1.96 earnings per share.
And total income exceeded projections of $7.43 billion, rising 4.4% to $7.63 billion.
Miller stayed positive about the company’s future despite the better-than-expected outcomes in the midst of such a difficult housing market since he thinks the state of the market will inevitably recover.
Miller added, “as and when interest rates normalize, we believe that pent-up demand will be activated and our margin will rapidly recover.”
While the ITB home-construction ETF has down 8.3% and the S&P 500 index SPX has given up 3.9%, Lennar’s stock has slumped 11.9% so far this year.
