Lennar (LEN) to Report Q2 Earnings: What's in the Cards?

Zacks Equity Research Published on June 16, 2016

Lennar Corporation (LEN - Free Report) is set to report second-quarter fiscal 2016 results on Jun 21, before the market opens.

Last quarter, it posted a positive earnings surprise of 21.15%. The company posted positive earnings surprises in all the past four quarters, with an average surprise of 18.06%.

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

Factors to Consider

The company delivered outstanding operating results in fiscal 2015 and first quarter of fiscal 2016. Backed by strong demand momentum, we expect strong volume trends to continue into the fiscal second quarter. This, along with higher selling prices, should provide ample support to both the top and bottom line.

However, Lennar’s gross margins have remained weak over the past few quarters due to rising land cost amid moderating home price growth. In the second quarter, gross margin is projected to be at the low end of the range of 23% to 24%. Overall, operating margins in 2016 are expected to be lower due to higher costs, competitive pressures and costs related to the development of previously in-active land assets.

However, labor shortages, rising land, labor and construction cost and sales slowdown in Houston are expected to keep the housing momentum in check in the to-be-reported quarter.

Earnings Whispers

Our proven model does not conclusively show that Lennar is likely to beat earnings this quarter. 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.

Zacks ESP: The Earnings ESP for Lennar is 0.00% as both the Most Accurate Estimate and Zacks Consensus Estimate stand at 87 cents.

Zacks Rank: Although Lennar’s Zacks Rank #3 increases the predictive power of ESP, the company’s ESP of 0.00% makes surprise prediction difficult.

Note that 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 a negative estimate revisions momentum.

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:

Meritage Homes Corporation (MTH - Free Report) , with an Earnings ESP of +1.27% and a Zacks Rank #3.

Owens Corning (OC - Free Report) , with an Earnings ESP of +3.53% and a Zacks Rank #3.

AECOM (ACM - Free Report) , with an Earnings ESP of +1.41% and a Zacks Rank #3.

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