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Will Lennar (LEN) Be Able to Top Q2 Earnings Estimates?

Zacks Equity Research

Lennar Corporation LEN is slated to report results for second-quarter fiscal 2019 (ended May 31) before the opening bell on Jun 25.

In the last reported quarter, the company’s earnings and revenues missed the Zacks Consensus Estimate by 1.3% and 5.3%, respectively. Nonetheless, this Miami-based homebuilder surpassed earnings expectations in four of the five trailing quarters.

How are Estimates Faring?

Let’s take a look at the estimate revision trend in order to get a clear picture of what analysts are thinking about the company prior to the earnings release.

For the quarter to be reported, the Zacks Consensus Estimate has remained unchanged at $1.13 per share over the past 60 days. This indicates a decrease of 28.5% from the year-ago earnings of $1.58 per share. Revenues are also expected to decrease 6.3% year over year to $5.11 billion.

Lennar Corporation Price and EPS Surprise

Let’s see how things are shaping up for this announcement.

Key Factors

Lennar is expected to report improved quarterly results than the fiscal first quarter, given lower mortgage rates, rebounding western markets and ongoing demand for affordable housing by multiple demographic groups. Notably, as California home sales are trending in a positive direction, Lennar is expected to benefit from higher volume and average selling prices.

Homebuilding: Robust backlog position and increased traffic on the back of improved consumer confidence, wage growth as well as lower mortgage rates are expected to be conducive to the company’s revenues.

It expects deliveries in the to-be-reported quarter within 11,700-12,000 units compared with 12,095 units reported a year ago. Average sales price is expected between 400,000 and 405,000 versus $413,000 in the year-ago period and $410,000 in the last reported quarter.

The company expects new orders in the 14,000-14,300 range compared with 14,440 in second-quarter fiscal 2018.

For the to-be-reported quarter, the Zacks Consensus Estimate for the company’s Homebuilding segment revenues (accounting for 93.7% of total revenues) is pegged at $4,803 million, suggesting a decrease from $5,064 million in the year-ago period but an increase from $3,624 million in the last reported quarter. This sequential improvement is expected to be driven by higher average selling prices and deliveries. Lennar is expected to gain from its dynamic pricing model that will enable it to price homes according to the current market conditions as they evolve.

From the margins perspective, Lennar expects fiscal second-quarter gross margin in the range of 20-20.5% (compared with 20.1% in the fiscal first quarter). Increase in the average sales price is expected to be partly offset by higher construction costs.

Indeed, labor shortages, higher construction costs, limited land availability, and increases in new and existing home sale prices have been hurting the homebuilding industry for quite some time now. Lennar is not an exception in this regard. Higher construction and land costs have been creating pressure on the company’s gross margin over the last few quarters.

Nonetheless, Lennar remains focused on continued improvement in the SG&A (selling, general and administrative) line, owing to operating leverage and investments in technology. SG&A expenses, as a percentage of home sales, are estimated within 8.5-8.6% compared with 8.7% a year ago and 9.5% in the fiscal first quarter.

For the Financial Services segment, the consensus estimate for the segment’s revenues is pegged at $207 million, implying a decrease from $232 million in the year-ago period but an increase from $143 million in first-quarter fiscal 2019.

What the Zacks Model Unveils

Lennar does not have the right combination of the two key ingredients — a positive Earnings ESP and a Zacks Rank #3 (Hold) or higher — to increase the odds of an earnings beat.

Earnings ESP: Lennar has an Earnings ESP of 0.00%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Currently, it carries a Zacks Rank #3, which increases the predictive power of ESP. However, the company’s 0.00% ESP makes surprise prediction difficult

Note that we caution against stocks with a Zacks Ranks #4 or 5 (Sell rated) going into the earnings announcement, especially when the company is witnessing negative estimate revisions.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Stocks With Favorable Combination

Here are some companies in the Zacks Construction sector, which according to our model have the right combination of elements to post an earnings beat in their respective quarters to be reported.

Acuity Brands, Inc. AYI has an Earnings ESP of +1.82% and a Zacks Rank #3.

Jacobs Engineering Group Inc. JEC has an Earnings ESP of +2.52% and holds a Zacks Rank #3.

Quanex Building Products Corporation NX has an Earnings ESP of +2.78% and a Zacks Rank #1.

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Click to get this free report Quanex Building Products Corporation (NX) : Free Stock Analysis Report Acuity Brands Inc (AYI) : Free Stock Analysis Report Jacobs Engineering Group Inc. (JEC) : Free Stock Analysis Report Lennar Corporation (LEN) : Free Stock Analysis Report To read this article on Zacks.com click here. Zacks Investment Research