As Berkshire Buys up Lennar Stock, Morgan Stanley Urges Caution

Dow Jones
Yesterday

Berkshire Hathaway continued its purchases of Lennar stock in recent days and now has an 11% stake in the No. 2 U.S. home builder, worth about $2.2 billion.

Berkshire purchased about 660,000 shares of Lennar stock from Monday through Wednesday and now holds 26.6 million shares, according to a Form four filing with the Securities and Exchange Commission late Wednesday.

Lennar shares were $81.59 as of Wednesday's close, down 1.71% on the day.

Berkshire has now purchased about five million shares of Lennar in the past two weeks, surpassing the 10% ownership threshold that requires disclosure of any purchases within two business days. Barron's has written about the earlier buys.

While Berkshire is bullish on Lennar, Morgan Stanley began coverage of the company Thursday with an Underweight rating, signaling a cautious outlook, citing earnings pressure on the company, its exposure to first-time home buyers, and a high price/earnings ratio relative to peer companies.

"LEN's asset-light shift can improve returns, but delivery growth must translate into stronger earnings and free cash flow. Incentives and lot costs remain headwinds, and we're cautious on first-time buyers," wrote Morgan Stanley analyst Adam Kramer, who has a price target of $65 a share. First-time home buyers are being squeezed by higher mortgage rates, which recently topped 7%.

Kramer expects the company to earn about $5 a share in both its current fiscal year ending in November, and its November 2027 fiscal year. The stock trades for about 16 times forward earnings.

The bull case on Lennar is that its earnings and margins are depressed relative to peers and can recover, and that the stock trades below its book value of about $90 a share, offering downside support.

The Berkshire purchases were probably orchestrated by investment manager Ted Weschler, who has a value-oriented bent. He reports to Berkshire CEO Greg Abel, who oversees the company's $350 billion equity portfolio.

It remains to be seen how much more Lennar stock will Berkshire want to buy and whether it's interested in buying the whole company if CEO Stuart Miller, who controls the home builder through majority ownership of the company's supervoting B shares, is willing to sell.

Berkshire already has a lot of exposure to the home-building industry with ownership of Clayton Home, the leader in manufactured housing, and Taylor Morrison, which it bought for $8.5 billion in July.

 

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