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Can Lennar (LEN) Sustain its Earnings Surprise Streak in Q1?

Zacks Equity Research

Miami-based homebuilder Lennar Corporation LEN is set to report first-quarter fiscal 2017 results on Mar 21, before market open. Last quarter, the company posted a positive earnings surprise of 5.51%. In fact, Lennar delivered a positive earnings surprise in each of the past four quarters, with an average surprise of 12.66%.

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

Lennar Corporation Price and EPS Surprise


Lennar Corporation Price and EPS Surprise | Lennar Corporation Quote

Factors to Consider

After outstanding fiscal 2015 results, Lennar posted strong numbers in 2016 as well. The company beat the Zacks Consensus Estimate for both earnings and sales in all the four quarters. The company is one of the best positioned homebuilders to capitalize on the housing recovery, driven by a diverse revenue mix, steady top-line performance, above-average order growth and improving SG&A leverage. This is expected to be reflected in the to-be-reported quarter as well.

Despite concerns regarding the possibility of a series of interest rate hikes by the Federal Reserve, optimism surrounding the housing market remains largely unscathed. Homebuilding stocks continue to advance on healthy demand-supply balance, stronger economic growth, tight inventory, modest wage growth, low unemployment levels and positive consumer confidence.

A bunch of reports released in recent times clearly show that single family housing has become the primary growth catalyst for the homebuilding sector. Such a trend is likely to continue this year, with mortgage rates still at appreciably low levels and demand outstripping supply.

Lennar expects to achieve a backlog conversion of approximately 70% in the fiscal first quarter. Given consistently strong demand, we anticipate strong volume trends to continue in the fiscal first quarter. This, along with higher selling prices, should provide ample support to both the top and the bottom lines.

Again, Lennar’s shares have gained 23.2% so far this year compared with 20% growth for the Zacks categorized Building-Residential/Commercial industry. Estimates also moved north for the current year and the next in the last 60 days.

However, going forward, labor shortage along with rising land and labor costs can keep the housing momentum at check and mar the company's performance.

Earnings Whispers

Our proven model does not conclusively show that Lennar is likely to beat on earnings this time around. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here, as you will see below.

Earnings ESP: The Earnings ESP for Lennar is -1.79% as the Most Accurate estimate of 55 cents is lower than the Zacks Consensus Estimate of 56 cents. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Lennar has a Zacks Rank #2, which increases the predictive power of ESP. However, the company’s negative ESP makes surprise prediction difficult

We caution against stocks with a Zacks Rank #4 or 5 (Sell rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are some companies in the construction sector that can be considered as our model shows that they have the right combination of elements to post an earnings beat in their upcoming releases:

Louisiana-Pacific Corporation LPX has an Earnings ESP of +3.57% and a Zacks Rank #1. The company is expected to report its quarterly results on May 8, 2017.

United Rentals, Inc. URI has an Earnings ESP of +1.31%. This Zacks Rank #3 company is expected to report its quarterly results on Apr 19, 2017. You can see the complete list of today’s Zacks #1 Rank stocks here.

Potlatch Corporation PCH has an Earnings ESP of +9.52% and a Zacks Rank #3. The company is expected to report its quarterly results on Apr 25, 2017.

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United Rentals, Inc. (URI): Free Stock Analysis Report
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Lennar Corporation (LEN): Free Stock Analysis Report
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