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Lennar (LEN) to Post Q1 Earnings: What's in the Offing?

Zacks Equity Research

Lennar Corporation LEN is slated to report results for first-quarter fiscal 2019 (ended Feb 28) before the opening bell on Mar 27.

In the last reported quarter, the company’s earnings surpassed the Zacks Consensus Estimate by 2.6%, while revenues missed the same by 1.1%. This Miami-based homebuilder surpassed expectations in all the trailing four quarters, with the average positive surprise being 73%.

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 been revised downward over the past 60 days to 75 cents per share. This reflects a decrease of 32.4% from the year-ago earnings of $1.11 per share. Nonetheless, revenues are expected to increase 37% year over year to $4.08 billion.

Lennar Corporation Price and EPS Surprise

Lennar Corporation Price and EPS Surprise | Lennar Corporation Quote

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

Key Factors

Homebuilding: Robust backlog position and increased traffic on the back of improved consumer confidence, wage growth and lower mortgage rates are expected to be conducive to the company’s revenues. Lennar ended fourth-quarter fiscal 2018 with a sales backlog of 15,616 homes and total dollar value of $6.6 billion, up 75% and 85%, respectively, from the 2017 level. The company expects deliveries in the to-be-reported quarter within 9,000-9,500 units compared with 6,765 units reported a year ago.

Meanwhile, the company expects new orders in the 9,700-10,000 range compared with 8,456 in first-quarter fiscal 2018. Average sales price is expected at about $410,000 versus $395,000 in the year-ago period.

For the to-be-reported quarter, the Zacks Consensus Estimate for the company’s Homebuilding segment revenues (comprising 92.8% of its total revenues) is pegged at $3.85 billion, depicting an increase from $2.66 billion in the year-ago period but a decline from $6.07 billion in the last reported quarter. This year-over-year 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 first-quarter gross margin in the range of 20-20.5% (compared with 19.5% reported in the first quarter of fiscal 2018). In the last reported quarter, gross margin on home sales was 21.4%. Excluding backlog and construction in process write-up, fiscal fourth-quarter 2018 gross margin on home sales totaled 22.1%, down 30 basis points year over year. The decline was due to higher construction costs that were partially offset by an increase in the average sales price of homes delivered and sales incentives.

Indeed, the housing market has been exhibiting a decelerating trend in recent times, putting up many hurdles for homebuilders. Labor shortages, higher construction costs, limited land availability, and increases in new and existing home sale prices have been making things worse. 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 9.5-9.8% compared with 9.7% a year ago.

For the Financial Services segment, the consensus estimate for the segment’s revenues is pegged at $191 million, reflecting an increase from $171 million in the year-ago period but a decline from $228 million in fiscal fourth-quarter 2018.

For the combined category of joint ventures, land sales and other, Lennar expects overall loss of approximately $15 million in the fiscal first quarter.

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, Lennar 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 construction sector, which according to our model have the right combination of elements to post an earnings beat in their respective quarterly reports:

M.D.C. Holdings, Inc. MDC has an Earnings ESP of +5.03% and a Zacks Rank #3.

Patrick Industries, Inc. PATK has an Earnings ESP of +3.41% and holds a Zacks Rank #3.

Installed Building Products, Inc. IBP has an Earnings ESP of +1.10% and a Zacks Rank #3.

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