BofA Securities Analyst Projects Millrose Spin-Off To Weigh On Lennar's Earnings, Cuts Price Target

BofA Securities analyst Rafe Jadrosich updated the price forecast for Lennar Corp LEN to reflect the impact of the weak housing market and the Millrose Properties spin-off.

The analyst slashed the price forecast to $130 from $140 while retaining a Neutral rating.

Last month, the company completed the spin-off, contributing $5.5 billion in land assets and $1.0 billion in cash.

Jadrosich noted Lennar will pay Millrose an annual option fee of 8.5%, which is expected to be reflected in the cost of goods sold.

The analyst projected a modest net income headwind from Millrose in 2025 (~2%), which was expected to gradually rise to a 6% headwind by 2027 as the land delivered accrued more interest.

Additionally, Jadrosich expected a 30 basis point headwind to gross margin in 2025, with this impact progressively increasing to 85 basis points by 2027.

The analyst wrote Millrose spin-off lowers their tangible book value (TBV) per share forecast by approximately 17%, but it boosts the analyst’s return on tangible equity (ROTE) forecast by 240bps, 260bps, and 270bps for 2025, 2026, and 2027, respectively.

Meanwhile, Jadrosich expected stronger ROTE tailwinds after 2025 due to the timing of share repurchases.

The analyst projected a $942 million drag on free cash flow (FCF) in 2025 due to the Millrose, which includes a $442 million option payment and a $500 million land deposit related to the spin.

After this initial cash flow headwind, FCF generation is expected to improve with faster inventory turns, added the analyst.

Due to the elevated FCF headwind in 2025, Jadrosich cut the repurchase forecast down to $750 million (from $2.2 billion) but anticipated a significant increase to $2.7 billion in 2026 and $3.0 billion in 2027.

Investors can gain exposure to the stock via iShares U.S. Home Construction ETF ITB and John Hancock Fundamental All Cap Core ETF JHAC.

LEN Price Action: Lennar shares are down 0.33% at $118.57 at publication Tuesday.

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Courtesy: Lennar Corp.