Moody’s is overstating the credit risk of Lennar Corporation (NYSE:LEN) with its Ba2 rating. Our fundamental analysis highlights a much safer credit profile for LEN, whose strong cash flows cover all their obligations including debt maturities, except in 2019. In addition, their sizable expected cash build should allow them to service all obligations including debt maturities when their cash flows fall short. We therefore rate LEN four notches higher at an IG4+ credit rating, or a Baa1 equivalent using Moody’s ratings scale.
Cash bond markets are also overstating credit risk with a cash bond YTW of 3.935% relative to an Intrinsic YTW of 2.635%, while CDS markets are accurately stating LEN’s credit risk with a CDS of 198bps relative to an Intrinsic CDS of 126bps.
Equity markets have a similarly bearish view for LEN with an 18.7x V/E’, which is moderate relative to history. The market expects ROA’ to marginally decline to 6% from 8% in 2015, with moderate 5% Asset’ Growth going forward. With analyst projections for a flat ROA’ as well, muted market expectations appear warranted and the equity is likely fairly valued.
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