Lennar Earnings: Home Deliveries Exceed Our Expectations; Gross Margin Headwinds Persist

Shares of Lennar traded lower on Sept. 20 after the no-moat-rated homebuilder reported its fiscal third-quarter results (ended Aug. 31) and issued fourth-quarter guidance. We believe the market was disappointed with Lennar's home sales gross profit margin of 22.5%, which was 190 basis points lower than the year-ago quarter and 50 basis points below management's guidance. Furthermore, management expects fourth-quarter gross margin to remain around 22.5%. Nevertheless, the leadership has done a good job managing selling, general, and administrative expenses, which were 6.7% of home sales during the third quarter, better than management's guidance of 7.3%-7.5%. Lennar has not shied away from using sales incentives to support a steady sales pace, and elevated incentives have been a gross margin headwind. However, with mortgage rates trending lower, and our view that rates will continue to ease, we suspect that Lennar will be able to begin pulling back on incentives. Indeed, we forecast home sales gross margin will improve to 24% over the next few years as demand for new homes strengthens, bolstering Lennar's pricing power. That said, we also see more competition from the resale market as lower rates loosen the rate lock-in effect.