Not many blemishes stood out in Lennar's (LEN, Financial) Q2 report. Although the home builder exceeded earnings estimates by a slimmer margin than last quarter, it was still a double-digit beat. Revenue also cleared analyst expectations easily, marking a return to form after a rare miss in Q1. Key metrics, including new orders, deliveries, and gross margins on home sales, surpassed LEN's targets. Additionally, the company's Q3 guidance signals another quarter of decent growth.
So why are sellers taking control today? LEN has been hovering around all-time highs for several months following a rapid rise in November. Part of LEN's impressive move was due to the anticipation of interest rate cuts in 2024, making housing more affordable and enticing existing homeowners to upgrade. However, halfway through 2024, there have been no rate cuts, and 30-year fixed-rate mortgage rates hit over 7.0% again in May, keeping existing home sales suppressed with a 1.9% year-over-year decline in April.
Against the backdrop of unfavorable interest rates, LEN's Q2 report, although sound, does not instill the utmost confidence in the housing market. However, it does not ring any alarms either, resulting in modest profit-taking today. The stock still sits nearly 50% higher than where it was in late October, underpinning sustained optimism that long-term tailwinds, including an undersupply of new homes and changing demographics, will eventually lead to reaccelerating growth.
- LEN reported EPS of $3.45, a 17% improvement year-over-year, supported by a 9% jump in total revenue to $8.77 billion. The company continued to leverage incentives to seal home sales, helping to prop up its top line. Despite using incentives, LEN still delivered gross margins on home sales of 22.6%, slightly better than its 22.5% prediction.
- These results reflected healthy demand, a trend LEN has highlighted repeatedly over the past several quarters. New orders climbed by 19% year-over-year to 21,293, landing at the high end of LEN's 20,900-21,300 forecast. Deliveries were 15% higher year-over-year at 19,690, topping the company's 19,000-19,500 estimate. The backlog increased to 17,873 homes, with a dollar value of $8.2 billion compared to $7.4 billion last quarter.
- For Q3, LEN projected new orders, deliveries, and gross margins on home sales to be roughly in line with Q2. For the year, LEN remains committed to delivering 80,000 homes with a margin consistent with FY23, around 23.3%.
Without a more inspiring Q2 report, investors are left focusing on the problems within the housing market. As interest rates stay elevated, LEN could face structural issues down the line, especially if current orders stem from individuals anticipating rate cuts this year. Still, over a longer time frame, LEN rests on a solid foundation to reignite growth.
Lastly, keep an eye on peers KB Home (KBH, Financial), which reports MayQ results today after the close; D.R. Horton (DHI, Financial), which reports JunQ results on July 18; and PulteGroup (PHM, Financial), which reports JunQ numbers on July 23.
