Lennar's Recovery May Take Longer Than Previously Thought

Argus maintained its Buy rating on Lennar Corporation LEN but cut its target price by $4 to $55 on expectations of company's delayed recovery.

“Although sales of new homes are on track to grow for the fifth straight year in 2016, we believe that the market is still only in the middle stages of a long upcycle. Both the supply of new homes and the demand for homes have been muted, which is the reason that the market hasn’t already become overheated,” analyst Christopher Graja wrote in a note.

The company is generating profits and cash from managing its building and land-acquisitions rather than sales. Further, the analyst expects a fall in gross margin as the company replaces lower cost land inventory with higher cost land upon delivery of homes.

“We do not expect the current cycle to peak unless 30-year mortgage rates jump towards 6% (from a current 3.8%) or U.S. sales of new single-family homes reach at least 700,000 units, which is well above the 502,000 new homes sold in 2015,” Graja continued.

On the positive side, the analyst believes the company’s broad geographic presence is likely to add earnings stability and focus on entry-level buyers in affordable regions including Texas, Florida, and the Carolinas would result in “industry-leading” results.

Meanwhile, Graja cut his FY 2016 EPS forecast to $3.91 from $4.00 and fourth quarter estimate to $1.33 from $1.39. The analyst also lowered his FY 2017 EPS estimate to $4.20 from $4.55.

Despite expecting additional pressure on profitability, the analyst sees higher profits from the company's ancillary businesses.

At time of writing, shares of Lennar were up 0.2 percent to $41.97.