Lennar Stock Is Believed To Be Significantly Overvalued

Author's Avatar
Jun 14, 2021
Article's Main Image

The stock of Lennar (NYSE:LEN, 30-year Financials) shows every sign of being significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $91.41 per share and the market cap of $28 billion, Lennar stock appears to be significantly overvalued. GF Value for Lennar is shown in the chart below.

1404498907282628608.png?1623693606

Because Lennar is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 10.9% over the past three years and is estimated to grow 10.77% annually over the next three to five years.

Link: These companies may deliever higher future returns at reduced risk.

It is always important to check the financial strength of a company before buying its stock. Investing in companies with poor financial strength have a higher risk of permanent loss. Looking at the cash-to-debt ratio and interest coverage is a great way to understand the financial strength of a company. Lennar has a cash-to-debt ratio of 0.38, which is in the middle range of the companies in Homebuilding & Construction industry. The overall financial strength of Lennar is 5 out of 10, which indicates that the financial strength of Lennar is fair. This is the debt and cash of Lennar over the past years:

1404498912483565568.png

It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low profit margins. Lennar has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $23.3 billion and earnings of $9.79 a share. Its operating margin is 15.31%, which ranks better than 79% of the companies in Homebuilding & Construction industry. Overall, the profitability of Lennar is ranked 8 out of 10, which indicates strong profitability. This is the revenue and net income of Lennar over the past years:

1404498916342325248.png

Growth is probably one of the most important factors in the valuation of a company. GuruFocus’ research has found that growth is closely correlated with the long-term performance of a company’s stock. If a company’s business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. Lennar’s 3-year average revenue growth rate is better than 72% of the companies in Homebuilding & Construction industry. Lennar’s 3-year average EBITDA growth rate is 20.9%, which ranks better than 77% of the companies in Homebuilding & Construction industry.

One can also evaluate a company’s profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Lennar’s ROIC is 10.41 while its WACC came in at 8.24. The historical ROIC vs WACC comparison of Lennar is shown below:

In closing, the stock of Lennar (NYSE:LEN, 30-year Financials) is believed to be significantly overvalued. The company's financial condition is fair and its profitability is strong. Its growth ranks better than 77% of the companies in Homebuilding & Construction industry. To learn more about Lennar stock, you can check out its 30-year Financials here.

To find out the high quality companies that may deliever above average returns, please check out GuruFocus High Quality Low Capex Screener.