Lennar (LEN)

Homebuilder Lennar (NYSE:LEN) fell short of the market’s revenue expectations in Q3 CY2025, with sales falling 6.4% year on year to $8.81 billion. Its GAAP profit of $2.29 per share was 9.2% above analysts’ consensus estimates.

Company Overview

One of the largest homebuilders in America, Lennar (NYSE:LEN) is known for constructing affordable, move-up, and retirement homes across a range of markets and communities.

Traditionally, homebuilders have built competitive advantages with economies of scale that lead to advantaged purchasing and brand recognition among consumers. Aesthetic trends have always been important in the space, but more recently, energy efficiency and conservation are driving innovation. However, these companies are still at the whim of the macro, specifically interest rates that heavily impact new and existing home sales. In fact, homebuilders are one of the most cyclical subsectors within industrials.

Competitors of Lennar include D.R. Horton (NYSE:DHI), PulteGroup (NYSE:PHM), and KE Home (NYSE:KBH)

Examining a company’s long-term performance can provide clues about its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Luckily, Lennar’s sales grew at a decent 9% compounded annual growth rate over the last five years. Its growth was slightly above the average industrials company and shows its offerings resonate with customers.

Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Lennar’s recent performance shows its demand has slowed as its annualized revenue growth of 2% over the last two years was below its five-year trend.

Lennar also reports its backlog, or the value of its outstanding orders that have not yet been executed or delivered. Lennar’s backlog reached $6.6 billion in the latest quarter and averaged 19.3% year-on-year declines over the last two years. Because this number is lower than its revenue growth, we can see the company hasn’t secured enough new orders to maintain its growth rate in the future.

This quarter, Lennar missed Wall Street’s estimates and reported a rather uninspiring 6.4% year-on-year revenue decline, generating $8.81 billion of revenue.

Looking ahead, sell-side analysts expect revenue to grow 2.5% over the next 12 months, similar to its two-year rate. This projection doesn't excite us and implies its newer products and services will not accelerate its top-line performance yet.

Cost of sales for an industrials business is usually comprised of the direct labor, raw materials, and supplies needed to offer a product or service. These costs can be impacted by inflation and supply chain dynamics.

Lennar has bad unit economics for an industrials company, giving it less room to reinvest and develop new offerings. As you can see below, it averaged a 24.2% gross margin over the last five years. That means Lennar paid its suppliers a lot of money ($75.77 for every $100 in revenue) to run its business.

This quarter, Lennar’s gross profit margin was 22.6%, in line with the same quarter last year. On a wider time horizon, Lennar’s full-year margin has been trending down over the past 12 months, decreasing by 2.5 percentage points. If this move continues, it could suggest a more competitive environment with some pressure to lower prices and higher input costs (such as raw materials and manufacturing expenses).

Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

Lennar has been an efficient company over the last five years. It was one of the more profitable businesses in the industrials sector, boasting an average operating margin of 15.6%. This result was particularly impressive because of its low gross margin, which is mostly a factor of what it sells and takes huge shifts to move meaningfully. Companies have more control over their operating margins, and it’s a show of well-managed operations if they’re high when gross margins are low.

Looking at the trend in its profitability, Lennar’s operating margin decreased by 7.4 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

This quarter, Lennar generated an operating margin profit margin of 9.4%, down 4.2 percentage points year on year. Since Lennar’s operating margin decreased more than its gross margin, we can assume it was less efficient because expenses such as marketing, R&D, and administrative overhead increased.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

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.

Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.

Lennar’s two-year annual EPS declines of 13.6% were bad and lower than its 2% two-year revenue growth.

Diving into the nuances of Lennar’s earnings can give us a better understanding of its performance. Lennar’s operating margin has declined over the last two years. This was the most relevant factor (aside from the revenue impact) behind its lower earnings; interest expenses and taxes can also affect EPS but don’t tell us as much about a company’s fundamentals.

In Q3, Lennar reported EPS of $2.29, down from $4.30 in the same quarter last year. Despite falling year on year, this print beat analysts’ estimates by 9.2%. Over the next 12 months, Wall Street expects Lennar’s full-year EPS of $10.20 to shrink by 9.6%.

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.

Lennar has shown impressive cash profitability, enabling it to ride out cyclical downturns more easily while maintaining its investments in new and existing offerings. The company’s free cash flow margin averaged 8.4% over the last five years, better than the broader industrials sector.

Taking a step back, we can see that Lennar’s margin dropped by 12.4 percentage points during that time. If its declines continue, it could signal increasing investment needs and capital intensity.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Although Lennar hasn’t been the highest-quality company lately, it historically found a few growth initiatives that worked out well. Its five-year average ROIC was 16.6%, impressive for an industrials business.

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. On average, Lennar’s ROIC decreased by 3.6 percentage points annually over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

Lennar burned through $277.2 million of cash over the last year. With $7.42 billion of cash on its balance sheet, the company has around 321 months of runway left (assuming its $7.05 billion of debt isn’t due right away).

Unless the Lennar’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.

We remain cautious of Lennar until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.

We enjoyed seeing Lennar beat analysts’ backlog expectations this quarter. We were also glad its EPS outperformed Wall Street’s estimates. On the other hand, its revenue missed. Overall, this print had some key positives. Investors were likely hoping for more, and shares traded down 3.3% to $128.60 immediately after reporting.

Updated: December 4, 2025 at 10:31 PM EST

We think that the latest earnings result is only one piece of the bigger puzzle. If you’re deciding whether to own Lennar, you should also grasp the company’s longer-term business quality and valuation.

We see the value of companies helping their customers, but in the case of Lennar, we’re out. Although its revenue growth was good over the last five years, it’s expected to deteriorate over the next 12 months and its projected EPS for the next year is lacking. And while the company’s impressive operating margins show it has a highly efficient business model, the downside is its declining operating margin shows the business has become less efficient.

Lennar’s P/E ratio based on the next 12 months is 15.8x. This valuation multiple is fair, but we don’t have much confidence in the company. There are more exciting stocks to buy at the moment.

Wall Street analysts have a consensus one-year price target of $126.93 on the company (compared to the current share price of $126.62).