Earnings Preview: Lennar Corp.

Lennar Corporation ( LEN - Analyst Report ) is set to report its first quarter 2013 results on Mar 20 before the market opens. Last quarter it posted a 30.23% positive surprise. Let’s see how things are shaping up for this announcement.

Growth Factors This Past Quarter

Lennar’s fourth quarter earnings beat the Zacks Consensus Estimate and, the year-ago figure on the back of double-digit growth in homebuilding revenues and solid operating margins. Double-digit growth in revenues in the quarter was driven by both pricing and volume growth in a stabilizing housing market.

However, the ever-rising cost of construction is a matter of concern for Lennar. LEN has also been witnessing weak performance from the Rialto sector since the past few quarters.

Earnings Whispers?

Lennar has witnessed solid year-over-year growth in new home orders, average selling prices and home closings in all the quarters of 2012. Margins have also been above average despite rising costs, driven by strong operating leverage.

Lennar expects to continue to achieve further profitability in fiscal 2013, despite expectations of higher input costs, on the back of rising home prices, strong liquidity position, solid backlog position, strategic land acquisitions and new community openings.

The backlog conversion ratio is expected to decline to around 75% in the first quarter and thereafter improve to approximately 90% per quarter thereafter. Gross margin is expected to be between 23% and 24% on an average in fiscal 2013 compared to 22.7% in 2012.

The Zacks Consensus Estimate for the first quarter stands at 14 cents. Estimates have seen a mixed movement after announcement of the fourth quarter results. The Zacks consensus estimate for fiscal 2013 has moved up by 0.6% to $1.58 over the past 90 days.

We believe that the company is performing better than its peers by increasing sales prices, reducing incentives, improving volumes and making opportunistic land acquisitions. However, the new home demand remains at historically low levels due to the current weak U.S. economic conditions and tight mortgage lending standards.

Sustainable increases in housing and housing demand for the long-term will require the overall economy to strengthen; including further job growth and less restrictive lending environment, which we believe will take time.

The stock carries a Zacks Rank #3 (Hold). We caution against stocks with Zacks Ranks #4 and #5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

Other Stocks to Consider

Stocks in the homebuilding sector that are performing well and deserve a mention include NVR Inc. ( NVR - Snapshot Report ) carrying a Zacks Rank #1 (Strong Buy), and D. R. Horton Inc. ( DHI - Analyst Report ) and Hovnanian Enterprises Inc. ( HOV - Snapshot Report ) , carrying a Zacks Rank #2 (Buy).