In 2023, homebuilder Lennar Corp. (LEN, Financial) experienced significant volatility in its share price. The year began with the stock at $94.35, which then escalated to nearly $129 per share by mid-July. However, it witnessed a drop to $104.20 per share in October before surging to over $146 at the time of writing.
Throughout the year, Lennar delivered an impressive return of nearly 50% to its shareholders, outperforming the S&P 500's gain of 24%. Despite this strong performance, the market continues to undervalue the stock at its current price.
A look at its business segments
As the second-largest homebuilder in the U.S., Lennar has diversified its operations across four main segments: Homebuilding, Multifamily, Financial Services and Lennar Others. The company not only constructs houses, but also provides services in mortgage loan origination and insurance titles, along with acquiring and developing land for building homes.
In 2023, the Homebuilding segment was the most significant contributor to Lennar's revenue, bringing in $32.67 billion, which accounted for nearly 95.4% of the total revenue. The Multifamily and Financial Services segments generated much smaller revenues of about $573.5 million (1.68%) and $976.86 million (2.85%).
While the Homebuilding segment led in revenue in 2023, the most profitable division was the Financial Services segment. It reported a remarkable operating margin of nearly 52.2%, amounting to operating earnings of $509.5 million. In comparison, the Homebuilding segment attained a lower operating margin of about 17%, yet it yielded a substantial operating profit of $5.53 billion. The Multifamily segment, however, faced a setback with a loss of approximately $50 million. Lastly, the Lennar Others segment, which concentrates on strategic technology investments and startup ventures to improve the homebuying and homeownership experience, operated at a loss. This segment recorded sales of merely $22 million and suffered a significant operating loss nearing $210 million.
Consistent revenue and profit growth
Lennar has demonstrated consistent profitability, marked by steady revenue and profit growth. Since 2013, the company's revenue has increased annually, showcasing an impressive growth trajectory despite fluctuations in the growth rate, which varied from 1% to 62.7%. This consistent growth has led to an increase in revenue from $5.94 billion in 2013 to $34.23 billion in 2023.
In parallel, Lennar's operating income has also risen every year from 2013 to 2022, climbing from $724 million to $6.72 billion. However, 2023 brought a challenge with a 14% decline in operating earnings. This downturn was attributed to reduced operating earnings in the Homebuilding segment, operating losses in the Multifamily and Lennar Other segments and increased corporate general and administrative expenses. Despite this setback, Lennar has maintained its profitability throughout the years.
Strong financial position and positive cash flow generation
Lennar's financial health as of November 2023 is remarkably robust, characterized by a strong balance sheet. The company has demonstrated substantial shareholder equity, amounting to $26.58 billion, and a significant reserve of cash and cash equivalents totaling $6.27 billion. Notably, Lennar's long-term debt is relatively low at $2.8 billion. This results in a debt-to-equity ratio of merely 0.1, reflecting the company's conservative approach to leveraging debt in its operations.
The company has adopted a strategic approach of utilizing land purchase options rather than direct land ownership. This method enhances operational flexibility and reduces risk. The advantage of this strategy is that it does not tie up substantial capital, consequently contributing to greater flexibility in Lennar's balance sheet.
There's a clear growth trend in Lennar's cash flow performance since 2016. The operating cash flow has been consistently positive, escalating from $507.8 million in 2016 to a peak of $4.19 billion in 2020. However, there was a significant decline of nearly 45% to $2.53 billion before recovering to $3.26 billion in 2022. The decrease in operating cash flow in 2021 was mainly due to the increase in the company's inventory level.
A similar trend is evident in Lennar's free cash flow. The free cash flow initially grew from $431.4 million to $4.11 billion in 2021. However, there was a subsequent plunge to $2.47 billion in 2022, followed by a recovery to $3.2 billion in 2023. This consistent positive cash flow generation underscores Lennar's financial resilience and effective cash flow management strategies.
Potential upside
Over the past decade, Lennar's earnings multiple has fluctuated, ranging from as low as 4.73 to as high as 21.25, with an average price-earnings ratio of 11.80. Currently, Lennar is trading at a multiple of 10.65 times its earnings. For 2025, Lennar is projected to generate approximately $37.1 billion in revenue and earn $16.15 per share. Applying its 10-year average earnings multiple of 11.80, Lennar's share price should be around $190.6, 30% higher than its current market valuation.
The bottom line
Lennar's performance in 2023 is a testament to its resilience and strategic prowess in the dynamic real estate sector. Despite market volatility and a temporary dip in operating earnings, the company's strong financial foundation, marked by a conservative balance sheet and consistent positive cash flow, speaks volumes about its operational efficiency. Although its stock gained nearly 50% in 2023, Lennar is estimated to be 30% undervalued, presenting a compelling opportunity for investors seeking a blend of stability and growth in their portfolio.
