Ticker Reports for October 1st
Why Lennar Stock Could Be the Best Play in the Housing Market
Lennar (NYSE: LEN) has headwinds in 2024, including margin pressure, but that is the worst news. While the housing market at large is tepid, conditions favor home builders, driving business, cash flow, and capital returns. Looking forward, there is a catalyst for 2025 in FOMC rate cuts.
High rates and affordability impact consumer demand today, but the headwind is expected to become a tailwind as the rate-cut process progresses. To paraphrase comments from Lennar CEO Stuart Miller, the market is only expected to strengthen over time as affordability improves.
Lennar Outperforms in Q3; Guidance Underwhelms
Lennar had a solid quarter in Q3, with deliveries and backlog growing compared to the prior year. The company reported 49.4 billion in net revenue for a gain of 7.7% over last year, outpacing expectations by 260 basis points. The gain was driven by a 16% increase in deliveries offset by a “slightly” lower average selling price impacted by mix and incentives. Mix and incentives also impacted the margin, which contracted compared to last year but less than the consensus forecast reported by MarketBeat.
The new home gross margin contracted by 190 basis points, offset by improved SG&A. The net margin on home sales contracted by 180 basis points, leaving net earnings up 5% and ahead of the consensus. The GAAP EPS of $4.26 is up 10%, including mark-to-market impact and other one-offs, but the adjusted is still strong at $3.90, flat YoY, and $0.33, or nearly 1000 basis points above the average forecast. The takeaway is that cash flow remains robust despite normalization following two years of intense activity, and the guidance remains favorable despite falling short of the consensus forecast.
The company guidance is underwhelming relative to the consensus estimates but expects a sequential improvement in delivery and flat margins compared to Q3. While tepid relative to expectations, the guidance implies cash flow sufficient to sustain fortress-quality operations and value-enhancing capital returns. Capital return in Q3 included $519 million in share repurchases, not including the dividend, and helped to reduce the average count by 4.5% YoY.
Lennar’s Building Value for Shareholders
Lennar’s positive cash-flow quarter allowed it to build shareholder value while paying dividends, repurchasing shares, and improving balance sheet health. The balance sheet highlights include a net cash position, no debt on the revolving facility, and improved equity despite the more than doubling treasury shares. Equity is up 3.15% and is expected to continue growing over time.
Assuming that the FOMC tailwind begins to impact the market soon, capital returns could easily accelerate in 2025. The dividend payment is less than 5% of earnings, and the total capital return for the quarter is less than 50%, leaving ample room for increases without earnings growth. The consensus for 2025 is for greater than 15% growth and is likely a cautious estimate given the outlook for interest rates.
Analysts Sentiment Drives Lennar Higher
The consensus price sentiment and price target for Lennar are a little misleading. The rating is pegged at Hold, down from a Moderate Buy, and the price target lags the price action. However, the rating slipped due to an influx of new reports initiated at Hold, with price targets leading the consensus higher. The consensus is up 35% compared to last year and 7.5% since the Q3 release, leading the market to the high-end range and a new all-time high. With 75% of the fresh revisions ranging from $190 to $235, the new high will likely be reached; the question is when.
The technical action is suggestive, with the market trending higher and winding up for its next move. The caution is that recent action looks like a rising wedge and may signal a correction is near. Up 200% in the last two years and trading at record levels, the market is ripe for a correction. In that scenario, targets for support and rebounding are $180, $170, and $165. A move below $165 could lead to $140 and a deep-value opportunity.
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2 Energy Stocks Fueling the AI Datacenter Boom
The artificial intelligence (AI) revolution is well underway. There are three essential components to deploy AI: the GPU, like NVIDIA Co. (NASDAQ: NVDA) chips to crunch the data; storage, like Micron Technology Inc. (NASDAQ: MU) NAND flash and high-bandwidth memory (HBM) memory chips to store the data, and networking like Ciena Inc. (NYSE: CIEN) optical transceivers to move the data.
However, there is one absolutely crucial component that overrides all the others: electricity, and lots of it.
AI has been driving the growth of data centers, which require increased electricity to operate, as AI processing can take 200% to 300% more electricity for optimal efficiency. The power and clean energy providers in the utilities sector are the indirect beneficiaries that are helping fuel the AI boom. Here are two energy stocks that are specifically powering AI and data centers.
Constellation Energy
Constellation Energy Co. (NASDAQ: CEG) make major headlines by announcing the largest power-purchasing deal in history with Microsoft Co. (NASDAQ: MSFT).
Constellation will invest $1.6 billion of its own money to reactivate the 835 megawatt (MW) nuclear reactor Unit 1 on Three Mile Island, which is expected to return to service in 2028. Constellation will also try to extend the license renewal for at least another 30 years.
Reviving Three Mile Island Unit 1 as Crane Clean Energy Center
The controversial Three Mile Island nuclear project was shut down in 1979 after a partial meltdown of Unit 2. This sparked a worldwide backlash against the dangers of nuclear reactors. However, Constellation states it was one of the safest and most reliable nuclear plants on the grid before being prematurely shut down. It will be renamed the Crane Clean Energy Center once it restarted.
This is assuming it gets all the permits and regulatory approval from the Nuclear Regulatory Commission (NRC). Chances are high for the approval, considering Unit 1 was still operating until 2019, when Constellation voluntarily curtailed the reactor due to profitability concerns. The NRC is expected to decide on its fate on July 31, 2025. The deal would create over 3,400 jobs, generating at least $3 billion in taxes for Pennsylvania.
Constellation Energy is the largest owner and operator of power plants in the United States, generating energy from a number of renewable sources, including wind, hydro, and solar, along with nuclear and coal. They are the nation's largest owner and operator of nuclear plants, supplying energy to residential, commercial and industrial customers.
Spotlighting the Enormous Energy Needs of Data Centers
In addition to being the largest power purchasing agreement in history, the deal also spotlights the growing power needs of data centers to power AI projects. Microsoft will be using nuclear-generated electricity to power its 635 MW data center. The news sent shockwaves, triggering a buying frenzy among uranium producers like Cameco Co. (NYSE: CCJ), which provides the yellowcake to fuel the reactors.
AI Is Driving Worldwide Data Center Power Demand
According to a Goldman Sachs report, data centers will consume 8% of all electricity produced by 2030, with AI driving a 160% increase in power demand. A ChatGPT query consumes 10x more electricity than an Alphabet Inc. (NASDAQ: GOOGL) Google search. U.S. utility companies will need to invest $50 billion in new generation capacity alone to accommodate the needs of data centers.
Europe is in the worst shape, with the oldest regional power grids on the planet, averaging 50 years old. Goldman Sachs predicts Europe will need over $1 trillion to prep its power grid to accommodate AI deployment, which will drive 40% to 50% more electricity demand.
Talen Energy
Talen Energy Co. (OTCMKTS: TLNE) is a Texas-based independent power producer that owns and operates power plants. The company also operates nuclear, coal, and natural gas power plants and solar and wind farms. Talen emerged from Chapter 11 bankruptcy in 2023.
In March 2024, Talen sold its 1,200-acre Cumulus Data Assets data center to AWS of Amazon.com Inc. (NASDAQ: AMZN) for $650 million. Talen will sell electricity to the data center campus in 120-MW increments up to 960 MW with a one-time option to cap commitment at 480 MW, up from 300 MW.
Don’t Let the Name Fool You
Talen Energy’s flagship asset is the Susquehanna Steam Electric Station in Salem Township, Pennsylvania. It is the sixth-largest nuclear plant in the country. It produces 63 million kilowatts daily between two nuclear reactors that have been online since 1983 with licenses to operate through 2042.
The word "steam electric" in its name sounds less ominous than "nuclear," but it is a nuclear power plant using nuclear fission to heat the water to make the steam that spins the turbines to generate the electricity. The steam is cooled and condenses back to water, which is recycled and pumped back into the reactor to heat again. This closed-loop cycle repeats itself indefinitely, generating 2.5 gigawatts or 2,500 MW of carbon-free clean energy.
Co-Location Controversy: Amazon Under Scrutiny for Bypassing Fees
Amazon’s newly acquired data center also happens to be co-located adjacent to the Susquehanna Steam Electric Station. In addition to buying the data center, Amazon also struck a deal to buy an additional 180 MW directly from the nuclear plant. This bypasses the electrical grid and the accompanying $140 million in transmission fees, which are used to maintain the power grid.
It has irked enough third parties that the deal is under regulatory scrutiny. Exelon Co. (NASDAQ: EXC) and American Electric Power Co. (NASDAQ: AEP) challenged the Amazon-Talon deal with the Federal Energy Regulatory Commission (FERC), stating that Amazon is getting a free ride bypassing the transmission fees, which would mean their customers would undertake the burden of the $140 million in costs. They claim Amazon would still be using and benefitting from the transmission system and should pay its share.
Talen Energy argues the major utilities are just trying to squash their deal and urged regulators to reject the challenge. FERC’s decision will likely set a precedent as co-location proposals have started to rise in states including Ohio, New Jersey and Texas.
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Will Marinus Pharmaceuticals Be the Next Big Winner in Biotech?
Marinus Pharmaceuticals (NASDAQ: MRNS) is a micro-cap pharmaceutical stock with multiple Wall Street analysts seeing significant upside. Both Oppenheimer and Cantor Fitzgerald recently issued or reiterated massive price targets for the company. Oppenheimer's $6 target signals that shares could rise 241% from their current $1.76 level, which is over triple-bagger potential.
Cantor Fitzgerald’s target is even more striking. The $13 price target is the highest among analysts covering Marinus. It implies that Cantor believes shares could rise by over seven times. On average, the analyst community aligns more with Oppenheimer's estimate at $6.89 per share.
Still, that’s an implied upside of 291%. However, it’s also important to note that analysts like Baird do not see much potential in the stock, with a price target of just $2.
So, what exactly does Marinus do, and what’s the deal with these massive differences in price targets? I’ll dissect those questions by diving into the company’s history and future.
ZTALMY: Generating Uninspiring Revenue
Marinus differentiates itself from many small pharmaceutical companies in a big way. It is in the commercial stage, as opposed to the clinical stage. This means that the company possesses medications approved by regulatory authorities, like the Food and Drug Administration (FDA), rather than those that researchers are studying.
This means the company can actually sell drugs and generate revenue, hence the commercial label. However, it has little to show for itself in terms of sales. Over the last four quarters, the company’s revenue has ranged from $7 million to $8 million.
The company’s primary drug, ganaxolone, marketed as ZTALMY, received FDA approval in 2022 to treat CDKL5 deficiency disorder. This very rare form of genetic epilepsy affects around 100 newborns per year. The company believes there are around 2,000 addressable pediatric patients.
Because of this, the drug's market is small, not allowing the company to capitalize significantly on its approval. Additionally, one-third of the product's revenue comes directly from Medicaid, which is U.S. government-provided healthcare for low-income individuals.
It typically has lower reimbursement rates than private insurance. That results in Marinus getting less revenue per prescription. The company’s product revenue did rise 87% year over year last quarter; however, the $7.9 million figure is still very small in absolute terms.
Failed Phase 3 Trial Causes Marinus Shares to Plunge
Marinus needs ganaxolone to get approved to treat other diseases and increase revenue. It hoped to treat refractory status epilepticus (RSE), a condition that affects around 150,000 per year, with an intravenous version of ganaxolone. However, Phase 3 trial results were disappointing, and shares dropped over 82% on the day of the April release. The company continued researching the drug, but the results in June were also disappointing.
The company is meeting with the FDA in the fourth quarter of 2024 to discuss how to proceed. However, the firm said it believes a strategic partner would better handle further research on the intravenous version of the drug. Marinus's revenue from this drug would likely be significantly reduced by working with a partner. At this point, Marinus’s ability to bring in significant revenue from treating RSE should largely be left out of the equation.
TSC Trial Results Hold the Keys for Marinus
However, the company is working to treat another disease that could save the day. The disease is Tuberous Sclerosis Complex (TSC). Marinus aims to treat it using oral ganaxolone, similar to CDKL5 deficiency disorder. However, this drug has a much larger potential market than CDKL5, affecting between 25,000 and 50,000 people in the U.S.
However, the company’s drug is only designed to help a subset of epilepsy patients. It considers its market for this drug to be around 12,700 patients, which is over six times the number of patients it sees for CDKL5.
The Phase 3 trial for treating TSC was recently completed, and the company hopes to release the results before the presidential election. If the results are positive, the drug could gain approval in late 2025 to early 2026. Analysts are setting differing price targets largely based on whether they believe the results will be positive, as they represent a massive inflection point for the firm. They could result in Marinus bringing in significant revenue in the next couple of years or force them back to the drawing board.
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