Homebuilder Lennar (NYSE: LEN), jumped into the news in September, when Berkshire Hathaway (NYSE: BRK.B) revealed it raised its stake in the company to about 10%. Lennar is the second biggest U.S. home manufacturer, after D.R. Horton (NYSE: DHI).
The move appears to be classic Berkshire, purchasing an apparently undervalued stock in an industry with staying power. Lennar’s forward price-earnings ratio is 9.2, well below the S&P 500’s P-E ratio of 19.2 and Lennar’s five-year average of 15.8. Its stock has dropped 34% over the past year.
Many analysts agree with Berkshire, the firm founded by Warren Buffett, that Lennar is undervalued. Morningstar analyst Suryansh Sharma puts fair value for the stock at $120, far above its recent price of $83. But he and others see Lennar as a mixed bag, with the company facing a weak housing market and intense competition.
“We assign a no-moat rating to Lennar, as we believe the firm has limited benefits from its scale and has no significant cost advantages,” Sharma wrote in a commentary. “No moat” means the company has no durable competitive advantage.
Lennar has wide diversity in customers, selling to first-time buyers, people stepping up to pricier digs, active older folks, and luxury buyers. It also benefits from one of the strongest balance sheets in the business, according to Sharma, with $1.15 billion of unrestricted cash as of Aug. 31.
‘Land-light’ asset strategy
Another plus: Lennar has worked on its capital efficiency by raising the amount of land it controls through options or other off-balance-sheet arrangements. That saves it from committing hefty sums of cash at the onset of purchases. Last year it spun off $6 billion of land to Millrose Properties. Now almost of all Lennar’s land is controlled through options.
“We believe Lennar’s land-light strategy will result in stronger cash flow conversion and returns on invested capital throughout the housing cycle,” he said.
But Sharma and others see plenty of headwinds for Lennar. First, there’s the negative current environment for housing. There is little inventory for people who aren’t wealthy. Prices are sky high, with single-family homes going for $434,800 in August on average, up 1.7% from a year earlier. And the 30-year fixed mortgage has burst above 7% for the first time since January 2025.
The outlook isn’t good for the housing, many analysts agree. “Earlier in the year, we expected mortgage rates to moderate through 2026,” Sharma said. “But given recent developments, we now expect mortgage rates to remain elevated and housing demand to remain soft through 2026 and into 2027.”
Built-in barriers
There are several disadvantages inherent in the housing industry for companies like Lennar, he noted. First, despite major consolidation over the past 40 years, the industry remains fragmented. That allows thousands of small homebuilders to compete, which means a lack of pricing power for builders.
Big competitors are a problem for Lennar too. They face few obstacles to copy successful product and land acquisition strategies, he noted. In addition, Lennar’s product isn’t much different than competitors’.
Its profit margins are an issue too, standing “worst in class,” Sharma said. The strategy of controlling land through options may not be helpful here, as the premiums paid for options could drag on margins, he pointed out.
Still, Sharma thinks Lennar can keep increasing its market share to 14% by 2035 from 12% in 2025. Improved efficiency should help, as Lennar’s construction costs fell 6% year-on-year in the quarter ended Aug. 31, and the average building time for a house hit a record low.
That should help the gross housing profit margin meet the company’s forecast of 15.5% to 16% this year, before hitting 19%-20% by 2030, he forecast.
So you can make a good case for Lennar going either way from here.
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