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Lennar (LEN) Set to Report Q3 Earnings: What to Expect

Christopher Vargas

Lennar LEN is set to report third quarter earnings on Wednesday before the opening bell. The homebuilder giant’s shares have gained 41.8% year-to-date, outpacing the broader construction service market’s 35.7% rise. The company is coming off a second quarter where they reported better than expected financials with solid Y/Y gains.

The manufacturing sector has contracted for the past two months in a row, and investors are looking to see how this might have affected the homebuilding industry. Let’s take a closer look at Lennar and how they might come out of the gates in their third quarter report.

Overview and Q2 Recap

Based in Miami, Florida and founded in 1954, Lennar is engaged in homebuilding and financial services. In February 2018, Lennar completed its merger with CalAtlantic and created the nation’s largest homebuilder based on revenues. The merger made CalAtlantic a wholly-owned subsidiary of Lennar. The company’s reportable segments include: Homebuilding, Financial Services, Multifamily, and Other.

In Q2, Lennar reported a sales spike of 1.9% to $5.56 billion, and earnings jumped 38.3% to $1.30 per share. Both earnings and revenue surpassed our estimates by 15.04% and 8.76%, respectively. The homebuilder sector brought in $5.2 billion while the multifamily segment reeled in $147.4 million for gains of 2.6% and 25.3%, respectively. The financial services division fell 18.2% to $204.2 million.

Deliveries of homes rose 5% to 12,729 and new orders were up 1% to 14,518 homes. Lennar said more moderate price increases and lower interest rates were leading buyers back into the market after a pause in the second half of 2018.

Q3 Outlook

Despite Lennar’s strong top and bottom-line reports, shares fell over 6% after the conference call the company held with investors. Company officials said that labor and land shortages are adding to costs and that tariffs are adding $500 to the cost of a new home. Macroeconomic headwinds have had investors jittery about the homebuilding sector, but the US housing market may be stronger than people think.

In August, sales of new U.S. single-family homes leapt 7.1%, which was well above economists' estimates for growth of only 3.5%. That placed the closely followed metric at a seasonally adjusted annual rate of 713,000 houses. New home sales in July were also revised to 666,000 units, up from a prior figure of 635,000.

It seems that the Fed’s rate cuts in July and September have had a positive impact on the housing market, as the low interest rate field has made it easier to finance a home. The increase in single family homes can benefit not just Lennar but other industry peers as well like Toll Brothers TOL and KB Home KBH.

Our Q3 consensus estimates forecast Lennar’s bottom line to slip 5.71% to $1.32 per share and for net sales to tumble 2.64% to $5.52 billion. The homebuilding division is projected to generate $5.16 billion and financial services is expected to come in at $212 million for respective declines of 2.3% and 10.3%. The multifamily segment is anticipated to contribute $113.1 million for a 11.9% climb.

Takeaway

With the manufacturing sector continuing to feel the macro and geopolitical headwinds from the trade war, companies like Lennar might see some decline in their respective performances. However, home sales rose more than expected in August, which may have helped bolster Lennar’s final month included in the company’s Q3. The firm has produced three earning beats over the past four quarters for an average EPS surprise of 8.5%. LEN sports a Zacks Rank #3 (Hold) with a Style Score of A in Value.

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