We came across a bullish thesis on Lennar Corporation (NYSE:LEN) on ValueInvestorsClub by lordbeaverbrook. In this article, we will summarize the bulls’ thesis on LEN. The company’s shares were trading at $134.00 when this thesis was published, vs. the closing price of $119.63 on Feb 28.

LEN is a homebuilding company with operations that include the construction and sale of single-family attached and detached homes, as well as the purchase, development, and sale of residential land; and development, construction, and management of multifamily rental properties.

LEN is set to gain momentum from underbuilding activities that have led to a shortage of 2-3 million housing units in the US. It is estimated that 1.5 million homes need to be built on account of population growth and reconstruction of houses due to fire, storms, etc. Due to a shortage of land, the construction pace is slow and is estimated to take 10-15 years in order to cope with the increasing demand. Between 1980-1999, the housing completion rate was 5.05 units/1000 people even when the average mortgage rate was 10.4%. This implies an inelastic demand that would provide a sustainable demand for LEN.

LEN is looking to spin off its land assets and adopt an asset-light model with a superior growth rate and free cash flow that is in tune with its earnings. Revenue is projected to grow at 10% due to an increase in community count and there would be no need to provide discounts to purchasers in a bid to sustain high volumes. An operating margin of 13.5% can be easily sustained as LEN looks to lower commissions to brokers and maintain a fixed SG&A expense. In a base case scenario, the expected 2027 EPS should be around $20.

LEN can be valued using a P/E of 16x, a premium to its competitor NVR which has a historical P/E of 15x. LEN offers a higher growth potential since NVR operates as a regional firm with a CAGR in deliveries of only 3% in the last 7 years (8.4% for LEN). Using a multiple of 16x, the fair price comes to $320, commanding a 167% premium from its current price.

While we acknowledge the potential of LEN as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than LEN but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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Disclosure: None. This article was originally published at Insider Monkey.