On May 23, we upgraded Lennar Corporation LEN by a notch to a Zacks Rank #2 (Buy).

Lennar is one of the best positioned homebuilders to capitalize on the housing recovery, courtesy of its diverse revenue mix, steady top-line performance, above-average order growth and improving SG&A leverage.

Though Lennar’s shares have gained 22.1% year to date, marginally underperforming the 24.3% growth of the Zacks categorized Building-Residential/Commercial industry, estimates have moved up.

Current year estimates rose 1.9%, reflecting seven upward and one downward revision in the past 60 days. Next year estimates moved up 6.2%, reflecting seven upward and no downward revision in the same time frame. Also, Lennar surpassed earnings in all of the past four quarters at an average of 8.7%. Diverse revenue mix, steady top-line performance, above-average order growth and improving SG&A leverage should drive the stock’s performance, moving ahead.

Thanks to strong demand in housing, Lennar started 2017 on a strong performance, beating the Zacks Consensus Estimate for both earnings and sales in the first quarter. Homebuilding revenues rose 12.8% in the first quarter, backed by an increase in home deliveries and consistent average selling price. Lennar’s core homebuilding results remain consistent with the “slow and steady” housing recovery.

Steady job and wage growth, a recovering economy, moderating home price gains, historically low interest/mortgage rates, rising rentals, rapidly increasing household formation and a limited supply of inventory point at strong housing demand in 2017.

Meanwhile, Lennar has strategically shifted from a land heavy acquisition strategy to acquiring lands with a shorter two to three-year average life. The company is presently focusing on slower but more orderly and sustainable growth to drive cash flow and profits. In Feb 2017, Lennar took over WCI Communities, Inc. With a portfolio of high quality, low cost land and 51 communities, the integration is expected to produce strong gross margin going forward.

The company was successful in achieving the lowest SG&A percentage in its history in 2016 and continued the trend in the first quarter. It plans to reduce SG&A expenses to the range of 9.1%–9.3% in 2017.

However, labor shortages, gross margin compression due to rising land and labor costs and a further increase in interest rates can somewhat keep the housing momentum in check.

Other Stocks to Consider

Other top-ranked stocks in the industry include Lyon William Homes WLH, M/I Homes, Inc. MHO and KB Home KBH.

Lyon William and M/I Homes sport a Zacks Rank #1 (Strong Buy). Full-year 2017 earnings for Lyon William are expected to increase 38.2% while that of M/I Homes is likely to rise 36.2%. You can see the complete list of today’s Zacks #1 Rank stocks here.

KB Home, a Zacks Rank #2 stock, is expected to witness 43.2% growth in fiscal 2017 earnings.

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