Inside Lennar’s Risk Factors Amid Spinoff Plan

Lennar (LEN) is an American homebuilder founded in 1954 and based in Florida. It is a component of the S&P 500, having first joined the index in October 2005. Lennar currently runs a diversified operation, but it plans to restructure in a manner that will result in some of its non-core businesses being transferred into a separate company. 

For its Fiscal Q4 2022 ended November 30, Lennar reported a 24% year-over-year rise in revenue to $8.4 billion, surpassing the consensus estimate of $8.2 billion. It posted adjusted EPS of $4.36, which increased 55% year-over-year and beat the consensus estimate of $4.15.

Lennar repurchased 10 million shares for $977.4 million during Q4. It ended the quarter with $2.7 billion in cash.

With this in mind, we used TipRanks to take a look at the newly added risk factors for Lennar.

Risk Factors

According to the new TipRanks Risk Factors tool, Lennar’s main risk category is Finance and Corporate, representing 41% of the total 44 risks identified for the stock. Production and Ability to Sell are the next two major risk categories at 23% and 11% of the total risks, respectively. Lennar recently updated its profile with five new risk factors.

Lennar cautions that its plan to spin off some of its businesses into a separate public company may not achieve the intended goals. The hope is that the split will result in the total combined company having a higher combined market value than it would if there was no split. But Lennar explains that the businesses to be separated may lose certain synergies enjoyed under the current setup. As a result, the combined market value of the company could end up being less than expected. 

Lennar tells investors that safety is a priority on its construction sites. However, it cautions that its subcontractors may breach safety regulations and expose it to penalties and adverse publicity, which could damage its reputation and cause it to lose business.

The company informs investors that it has been struggling with labor and material shortages. As a result, it now takes more time to build a home, which is delaying home deliveries. The shortages have also led to rising costs of labor and materials. Lennar cautions that these challenges could continue, and if it fails to pass on the additional costs to customers, its profit margins in 2022 may be pressed.

The Finance and Corporate risk factor’s sector average is 37%, compared to Lennar’s 41%. Lennar’s stock has gained about 31% over the past 12 months.

Analysts’ Take

In January, UBS analyst John Lovallo initiated coverage of Lennar stock with a Buy rating and a price target of $145, which suggests 50.87% upside potential. Lovallo believes that the spinoff that Lennar has proposed could be transformational, citing potential return and de-risking benefits. Furthermore, the analyst sees home orders exceeding sales and gross margins remaining high.

Consensus among analysts is a Moderate Buy based on 10 Buys, 4 Holds, and 1 Sell. The average Lennar price target of $128.40 implies 33.60% upside potential to current levels.

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