Lennar Stock Surged After Earnings. What’s Behind the Move.

A worker is seen as construction takes place at a Lennar Corp. project.

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A day that began rocky for home builder stocks turned around after


held its post-earnings conference call this morning.

Lennar executive chairman
Stuart Miller
discussed a strong environment for home building during the call—but that’s not all that sent the stock soaring. Lennar (Ticker: LEN) was the S&P 500’s biggest gainer on Wednesday, closing at $100.95, up 13.8%.

The home builder reported earnings of $3.20 per share for its first quarter Tuesday night. Without a pretax gain of about $470 million related to the homebuilder’s Opendoor (OPEN) investment, the company said its earnings per share would have been $2.04.

Miller touted the gain on the call with investors—and touched upon other technology investments made through LENx, the company’s vehicle for strategic investments. “While this gain is extraordinary, relative to our operating platform, it is not a onetime event for the company,” he said, referencing the recent sale of its SunStreet solar business and investments in technology companies like Hippo home insurance and title company Doma (previously called States Title) that have recently announced plans to go public via special purpose acquisition companies. “We are conservatively estimating an economic gain in excess of $1 billion from these companies,” Miller said.

Those investments “kind of broke a logjam today on what multiple you’re supposed to pay for these guys,” Smead Capital Management’s
Bill Smead,
whose fund Smead Value Fund invests in Lennar, told Barron’s by phone. “It’s technology disruption in the residential housing world.”

Lennar’s relatively high gross margin on home sales—and the expectations that it will continue—likely also contributed to the company’s rise Wednesday. In its earnings report, Lennar reported margins of 25%—tied with the fourth quarter of 2020 for its highest since at least 2017—and guided toward 25% margins for 2021.

In a note raising the company’s price target to $110 from $98.05, Wedbush analyst Jay McCanless cited the company’s margin guidance, which was ahead of Wedbush’s forecasted 23.8%. “LEN believes pricing power, less interest amortization, locking home costs early in the process, and matching starts to sales are all catalysts to drive the higher gross margin levels,” McCanless wrote.

The company also announced its intention to “have Lennar stand alone as a pure-play homebuilder and financial services company” by spinning off non-core business into a new company. Miller said the new company “may contain all or parts of the assets” of Lennar’s multifamily, single-family for rent, land management, mortgage finance, commercial mortgage, and technology investment businesses. Miller said the new company’s asset base would be between $3 billion and $5 billion without debt.

In a Wednesday afternoon earnings recap, KeyBanc Capital Markets’ Kenneth R. Zener wrote that the spin-out helps clarify upside. “These investments symbolize both LEN’s savvy investments in the homebuilding industry, as well as its recognition that a cleaner home-building business will create a less noisy earnings outlook,” Zener wrote.

The spinoff, wrote Wedbush’s McCanless, “should remove some of the lumpiness in Lennar’s income statement and make the company more comparable to the balance of our coverage.”

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