KBW cuts Lennar to Underperform, upgrades Toll Brothers on housing market divide

Investing.com -- KBW downgraded homebuilder Lennar Corporation to Underperform from Market Perform and upgraded Toll Brothers to Outperform, arguing that a “K-shaped” U.S. housing market increasingly favors luxury-focused builders over those with greater exposure to entry-level buyers.

The brokerage lowered its price target on Lennar to $86 from $97 and reduced its 2026 and 2027 earnings-per-share estimates by 5% to $6.05 and $7.03, respectively. KBW said Lennar faces margin pressure from its Millrose land-option structure, which it estimates will create an additional 50-basis-point gross-margin headwind in both 2026 and 2027.

KBW also cited Lennar’s significant exposure to entry-level homebuyers, estimated at roughly 50% of its sales mix, at a time when affordability challenges, elevated mortgage rates and weaker consumer confidence are weighing on demand. The firm expects builders serving lower- and middle-income buyers to continue relying on incentives, limiting margin recovery.

In contrast, KBW raised its target price on Toll Brothers to $161 from $158, highlighting resilient luxury housing demand, a longer-duration land position and stronger pricing power. The brokerage forecasts 6% to 8% order growth in 2026-2027 and stable gross margins around 26%, supported by affluent buyers with higher credit scores, larger down payments and a greater propensity to pay cash.

KBW noted that Toll Brothers trades at about 1.5 times book value, a discount to larger peers despite what it views as a superior demand and margin profile. The firm said the combination of relative valuation, fundamentals and macroeconomic trends favors owning Toll Brothers over Lennar.

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