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On Friday, Jefferies maintained a Hold rating on Lennar Corporation (NYSE:), while increasing the stock’s price target to $144 from $136. The adjustment reflects an anticipation of higher gross margins in a stable interest rate environment.
Lennar is expected to see its home sales gross margin grow by approximately 70 basis points quarter over quarter to 22.5% in the second quarter and continue to improve throughout the year, aiming to meet the reiterated full-year 2024 margin guidance of around 23%.
The anticipated improvement in margins is attributed to various cost initiatives undertaken by Lennar. These include obtaining price concessions from trades and suppliers, value engineering efforts, and leveraging some fixed costs, particularly field expenses. Value engineering efforts are focused on reducing the number of production templates, concentrating on the most popular and profitable floor plans.
Additionally, land inflation has been on the rise, which is particularly significant given Lennar’s strategy to acquire already developed land to enhance asset turnover. The company’s approach aims to streamline operations and increase efficiency in asset management.
The report suggests that if interest rates were to decrease, Lennar could see further upside to the 23% margin guidance. This potential increase in margins would be facilitated by lower rate buy downs contributing positively.
Still, the report indicates that this scenario would likely depend on a “soft economic landing,” implying that a gentle deceleration in economic activity could prevent the need for increased incentives to address affordability concerns for homebuyers.
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