Is Lennar Stock A Bargain At $110?

Lennar (NYSE: LEN), one of the largest homebuilders in the U.S., has decreased by 13% year-to-date, lagging behind the S&P 500’s 6% increase. At a glance, the stock appears to be a good deal, trading at only 0.8x sales and 9.2x earnings, significantly lower than the average of the index. However, these discounts carry some challenges. Persistently high mortgage rates, declining housing demand, and aggressive price reductions have negatively affected profitability and shaken investor confidence. Even though the company surpassed revenue expectations in Q2, Lennar’s margins are facing pressure, prompting a crucial question: Is this stock merely cheap, or is it cheap for a reason? Nevertheless, for those seeking upside with less volatility than individual stocks, the Trefis High Quality portfolio offers an alternative, having outperformed the S&P 500 and achieved returns exceeding 91% since its inception.

Examining Lennar’s fundamentals reveals some inherent weaknesses. The company’s price-to-free cash flow (P/FCF) ratio is at a high of 107.9, indicating weak cash conversion and causing concerns about the sustainability of its current valuation. While the stock may seem inexpensive, the premium that investors pay is not reflected in the valuation multiple; it lies in the volatility and margin compression associated with exposure to the housing market.

Q2 Recap: Sales Beat, Margins Shrink

Lennar published mixed Q2 2025 results (November fiscal year). Revenue amounted to about $8.4 billion, outperforming estimates due to a 6% increase in new home orders and a 2% rise in deliveries. However, net income fell nearly 50% year-over-year to $477 million, as gross margins shrank to 17.8% due to aggressive discounting and mortgage incentives. The average selling price declined by 9% to $389,000, accentuating ongoing affordability challenges. While the company maintained strong liquidity and bought back $517 million in stock, EPS of $1.90 fell short of expectations, and high SG&A expenses further pressured profitability. Despite gaining market share and moving towards an asset-light model, investor sentiment remained wary due to narrowing margins and decreasing demand.

Margins Under Pressure Despite Scale

Lennar’s recent financial performance indicates increasing pressure on both growth and profitability. Although Lennar’s Revenues grew at an average annual rate of 5.9% over the past three years, slightly above the S&P 500’s 5.5%, it declined by 1.1% in the past 12 months. In the latest quarter, revenue dropped 4.4% year-over-year to $8.4 billion, whereas the S&P 500 experienced a 4.8% increase. Profitability metrics present a more troubling scenario: Lennar’s Operating Income of $4.1 billion corresponds to a modest 11.5% margin (over the last four quarters), while Lennar’s Operating Cash Flow (OCF) of only $410 million yields a weak 1.2% margin, far below the S&P’s 14.9%. Lennar’s Net Income of $3.3 billion shows a margin of 9.2%, which also falls short of the index’s 11.6%. Overall, the company’s margins and cash generation are under pressure despite its scale.

How Does Lennar Hold Up in a Downturn?

Lennar has historically lagged the broader market during significant downturns, facing steeper declines than the S&P 500 in every crisis. During the 2022 inflation shock, the stock dropped by 44.8%, in contrast to the S&P 500’s 25.4% decline. The COVID-19 crash in 2020 saw Lennar plunge 58.8%, nearly double the index’s 33.9% drop. Most notably, during the 2008 financial crisis, the stock fell by 93.5%, while the S&P 500 dropped by 56.8%. Although Lennar has eventually recovered following each downturn, it has consistently lagged in the early phases of recovery, highlighting its vulnerability in volatile market conditions. Our dashboard How Low Can Stocks Go During A Market Crash illustrates how key stocks performed during and after the last six market crashes.

A Smarter Way to Play the Market?

While it doesn’t seem like there is currently much potential upside to LEN stock, the Trefis Reinforced Value (RV) Portfolio has outperformed its all-cap stocks benchmark (a combination of the S&P 500, S&P mid-cap, and Russell 2000 benchmark indices) to deliver solid returns for investors. What’s the reason? The quarterly rebalanced mix of large-, mid- and small-cap RV Portfolio stocks offers a responsive approach to capitalize on favorable market conditions while minimizing losses when markets decline, as explained in RV Portfolio performance metrics.