BofA lowers Lennar stock price target on higher SG&A expenses

BofA Securities lowered its price target on Lennar (LEN) to $105 from $110, maintaining a Neutral rating, following a Q2 earnings report where EPS of $1.90 (excluding mark-to-market losses) missed BofA's estimate due to higher SG&A expenses and lower deliveries. While Lennar's Q3 guidance aligned with BofA's forecast for deliveries and gross margin, the firm reduced its fiscal 2025 EPS estimate by 12% and cited a lower return on equity outlook. Other firms including RBC, UBS, and Citi also adjusted price targets in response to margin pressure and increased expenses, reflecting concerns about Lennar's profitability in a cooling housing market.

Analysis

Multiple financial institutions, including BofA Securities, RBC Capital, UBS, and Citi, have recently adjusted their outlooks on Lennar (NYSE:LEN), predominantly through price target reductions, reflecting concerns over profitability and operational headwinds. BofA Securities lowered its price target to $105.00 from $110.00, maintaining a Neutral rating, after Lennar's second-quarter fiscal 2025 adjusted earnings per share of $1.90 (excluding mark-to-market losses) fell short of BofA's $2.08 estimate, primarily due to elevated selling, general, and administrative (SG&A) expenses, lower-than-expected deliveries, and reduced average selling prices. Although Lennar's third-quarter guidance for deliveries and gross margin aligned with BofA's projections, the company's SG&A expense forecast of 8.0%-8.2% significantly surpassed BofA's 6.7% expectation, prompting a 12% reduction in BofA's fiscal 2025 EPS estimate for Lennar and a lowered price-to-tangible book value multiple based on a diminished return on equity outlook. While Lennar's reported Q2 revenue of $8.38 billion surpassed the $8.18 billion forecast, the EPS of $1.90 also missed the general consensus of $1.94. Other analysts echoed concerns: RBC cited gross margin pressure, UBS noted the potential long-term benefits of the operating strategy despite a PT cut, Citi pointed to disappointing Q2 results, and Oppenheimer highlighted worries about technology investments affecting margins. Despite these analyst revisions and the stock trading near its 52-week low ($104.98), InvestingPro data suggests Lennar is undervalued, with a P/E ratio of 8.33x, and possesses strong financial health (overall score 2.9 GOOD), indicated by robust cash flows and solid balance sheet metrics. This contrasts with the prevailing moderately negative sentiment (-0.35 score) surrounding the stock, exacerbated by five analysts revising earnings expectations downward and the challenges of a cooling housing market.

Key Decisions for Investors

• Investors should meticulously track Lennar's SG&A expense progression and its direct influence on profitability, as this factor is a key driver behind recent analyst price target reductions and downward revisions to earnings per share estimates.
• While Lennar trades near its 52-week low and InvestingPro data indicates potential undervaluation and strong financial health, these aspects must be carefully weighed against consistent analyst concerns regarding margin compression, a lower return on equity outlook, and escalating operating costs within a decelerating housing market.
• It may be prudent to evaluate Lennar's strategic responses to rising costs and assess its competitive positioning, particularly its return on equity, relative to other homebuilders, as suggested by BofA's commentary on seeking higher ROE profiles elsewhere in the sector.