Lennar currently trades at $115.10 per share and has shown little upside over the past six months, posting a middling return of 3.5%. The stock also fell short of the S&P 500’s 13% gain during that period.
Is now the time to buy Lennar, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free for active Edge members.
Why Do We Think Lennar Will Underperform?
We're swiping left on Lennar for now. Here are three reasons we avoid LEN and a stock we'd rather own.
1. Backlog Declines as Orders Drop
We can better understand Home Builders companies by analyzing their backlog. This metric shows the value of outstanding orders that have not yet been executed or delivered, giving visibility into Lennar’s future revenue streams.
Lennar’s backlog came in at $6.65 billion in the latest quarter, and it averaged 19.2% year-on-year declines over the last two years. This performance was underwhelming and shows the company is not winning new orders. It also suggests there may be increasing competition or market saturation. 
2. EPS Barely Growing
Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.
Lennar’s unimpressive 7% annual EPS growth over the last five years aligns with its revenue performance. This tells us it maintained its per-share profitability as it expanded.
3. Free Cash Flow Margin Dropping
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, Lennar’s margin dropped by 11.9 percentage points over the last five years. If its declines continue, it could signal increasing investment needs and capital intensity. Lennar’s free cash flow margin for the trailing 12 months was negative 1.9%.
Final Judgment
Lennar doesn’t pass our quality test. With its shares trailing the market in recent months, the stock trades at 14.3× forward P/E (or $115.10 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. There are superior stocks to buy right now. We’d suggest looking at a top digital advertising platform riding the creator economy.
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