We expect leading national homebuilder, Lennar Corporation (LEN - Analyst Report), to beat expectations when it reports fiscal fourth-quarter and full-year 2013 results on Dec 18.
Why a Likely Positive Surprise?
Our proven model shows that Lennar is likely to beat earnings because it has the right combination of two key ingredients.
Positive Zacks ESP: Expected Surprise Prediction or ESP (Read: Earnings ESP), which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, stands at 1.59%. This is very meaningful and a leading indicator of a likely positive earnings surprise for shares.
Zacks Rank: Lennar carries a Zacks Rank #3 (Hold). Note that stocks with Zacks Ranks #1, 2 or 3 have a significantly higher chance of beating earnings. The Sell-rated stocks (#4 and 5) should never be considered going into an earnings announcement.
The combination of Lennar’s Zacks Rank #3 (Hold) and +1.59% ESP makes us confident about a positive earnings beat.
What is Driving the Better-Than-Expected Earnings?
Despite rising interest rates and home prices, Lennar delivered strong third-quarter results in September. Though net orders slowed in the third quarter ended Aug 31 due to rising interest rates, management is optimistic that the moderating sales pace was only temporary and the housing recovery was still intact.
The company is confident of seeing strong demand in the fourth quarter and thereafter as buyers adjust to the rising interest rates/home prices and return to the market, credit standards ease and supply remains limited.
Lennar’s profitability is expected to continue to improve in the fourth quarter on the back of its solid backlog position, rising home prices, strong liquidity position and strategic land acquisitions. In addition to its homebuilding operations, growth is also expected from its multiple platforms including Rialto, Multifamily and Financial Services. Gross margin is expected to be flat with the third-quarter levels of 24.9%.
In fact, Lennar has been witnessing solid year-over-year growth in new home orders, average selling prices and home closings for the past few quarters.
Other Stocks to Consider
Here are some other construction companies which you may consider, as our model shows they have the right combination of elements to post an earnings beat this quarter:
Ryland Group Inc. (RYL - Snapshot Report), withEarnings ESP of +6.09% and a Zacks Rank #3 (Hold)
PulteGroup, Inc. (PHM - Analyst Report), withEarnings ESP of +10.64% and a Zacks Rank #3 (Hold)
MDC Holdings Inc. (MDC - Snapshot Report), withEarnings ESP of +33.87% and a Zacks Rank #3 (Hold)