Shares of Lennar Corporation (LEN 2.85%) fell 24% in March, according to data from S&P Global Market Intelligence. Homebuilders in the United States have been crushed by rising input costs and declining demand, forcing them to cut prices to move inventory. The stock is now down by more than 50% from its all-time high.
Here's why Lennar stock fell in March, and whether it is worth buying the dip in April.
NYSE: LEN
Key Data Points
Price cuts to drive volume
Lennar's revenue came in below Wall Street estimates in the quarter it reported in March, at $6.6 billion, vs. expectations of at least $6.84 billion. Earnings were positive, but also weaker than expected.
Driving down Lennar's revenue -- which declined from $7.6 billion in the same period a year ago -- is the weak demand from homebuyers in the United States. Few people can afford to buy a home at the average prices being quoted, with these elevated mortgage rates increasing monthly payments significantly. The average selling price of a Lennar home fell to $374,000 last quarter, down from $408,000 a year ago. In turn, this led to gross margins falling to a slim 15.2% last quarter.
With inflation fears spiking again due to rising oil prices, investors are worried that mortgage rates will remain elevated in the United States, straining affordability for homebuyers and keeping Lennar's earnings down for even longer.
Image source: Getty Images.
Time to buy the dip?
To take advantage of the falling stock price, Lennar is repurchasing a large portion of its outstanding shares through its share buyback program. Outstanding shares are down 20% over the last five years, which should help grow earnings per share (EPS) over the long term once the housing market turns positive for homebuilders.
Lennar is transitioning its business model to a land option model, which requires fewer upfront land purchases by working with financing partners. This will free up its balance sheet and allow it to more quickly turnover inventory, therefore increasing free cash flow that can be returned to shareholders.
Right now, Lennar trades at a price-to-earnings ratio (P/E) of 12.6. At the same time, net income has fallen to $1.7 billion, down from a peak of $4.5 billion. With a market cap of $22 billion, if you believe that Lennar can return to its pre-downturn peak net income of $4.5 billion, the stock looks cheap despite the business going through a rough patch today. Investors who are fans of homebuilders can buy Lennar stock.
