Lennar (NYSE: LEN) shares fell 5% to a multi-month low after setting tepid guidance for Q2. However, the move is overblown in light of the guidance, full-year outlook, cash flow, and robust capital return. The market could move lower before it moves higher, but a rebound is expected soon and will likely take the market to a new high.

Lennar Builds More Than Homes, It Builds Value

Lennar is a premier home-builder in the US, producing more than just houses. The firm is in business to build homes, but its job is to pay shareholders when the cash flow allows. The latest earnings results highlight Lennar’s ability to pay dividends and repurchase shares, with top and bottom-line performance outpacing the consensus estimates reported by MarketBeat. The company logged $8.77 billion in net revenue for a gain of 8.9%, beating consensus by $0.22 billion or 250 basis points. The strength was driven by demand, pricing, and internal efficiency, which combined to drive wider margins.

The GAAP and adjusted earnings grew by 14% and 15%, respectively. Pricing and demand leverage are in play, but efficiency is the news. The company reduced its cycle time by 30% on improved build time and increased its inventory turn to 1.6x per quarter, reducing labor and leveraging fixed costs. Margin is expected to narrow slightly in Q2 but remain solid, leaving the cash flow outlook healthy. 

Guidance aligns with the consensus forecast, providing no catalyst for higher share prices today. However, the company’s backlog increased in Q1 and is expected to remain flat in Q2 despite increased deliveries. The average price is expected to fall by 1.15%, but the increase in delivery will offset the difference and drive sequential growth. The takeaway is that business is healthy, and capital returns will continue. 

Lennar Improves Shareholder Value in Q1

Lennar had negative cash flow in Q1, but that is the only negative to report. The cash draw was used to pay down debt, repurchase shares, and pay dividends, leaving the company in a fortress position. The balance sheet remains net cash despite the draw, and net leverage is down. Total liabilities fell by nearly $1 billion, or 7.2%, and equity increased by 1.1%. 

The share count fell nearly 4% on average for the quarter, reducing the total distribution load, accelerating book value growth, and setting the dividend up for increases. The dividend isn’t large at 1.35% or 15% of earnings but is safe and reliable. The next increase could be large because the last distribution increase was 30%, and the balance sheet is rock solid.  

The analyst response to the news is mixed, but the two takeaways are that the community is Holding Lennar and sees it advancing about 12% at the midpoint. The two revisions tracked by MarketBeat following the release are reiterated ratings amounting to a Hold and a consensus of $185. The $185 target is above the broad consensus, which is trending higher and leading the market. 

Lennar Pulls Back to Critical Support

Lennar shares fell more than 5% following the news and could fall further, but critical support targets would need to be broken to do it. The targets coincide with a congestion band in the price action and a pair of moving averages that have produced strong rebounds in the past. Assuming the market follows through as it has, the price action should rebound soon. If not, this market risks falling below the moving averages and confirming them as resistance. In that scenario, this stock could fall 10% to 15% regardless of the value, repurchases, and yield.