Shareholders of Lennar would probably like to forget the past six months even happened. The stock dropped 28.1% and now trades at $83.36. This was partly due to its softer quarterly results and might have investors contemplating their next move.
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.
Why Do We Think Lennar Will Underperform?
Despite the more favorable entry price, we don't have much confidence in Lennar. Here are three reasons there are better opportunities than LEN and a stock we'd rather own.
1. Backlog Declines as Orders Drop
Investors interested in Home Builders companies should track backlog in addition to reported revenue. 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 billion in the latest quarter, and it averaged 11.4% 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. Free Cash Flow Margin Dropping
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
As you can see below, Lennar’s margin dropped by 7.5 percentage points over the last five years. Continued declines could signal it is in the middle of an investment cycle. Lennar’s free cash flow margin for the trailing 12 months was breakeven.
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Lennar’s ROIC has unfortunately decreased. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
We cheer for all companies making their customers lives easier, but in the case of Lennar, we’ll be cheering from the sidelines. Following the recent decline, the stock trades at 13.8× forward P/E (or $83.36 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. There are better investments elsewhere. We’d suggest looking at the Amazon and PayPal of Latin America.
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