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Lennar (LEN) Q4 Earnings: Disappointment in the Cards?

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Miami-based homebuilder Lennar Corporation (LEN - Free Report) is set to report fourth-quarter fiscal 2016 results on Dec 19, before the market opens. Last quarter, the company posted a positive earnings surprise of 14.77%. In fact, Lennar has recorded positive earnings surprises in all of the past four quarters, with an average surprise of 13.29%.

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

LENNAR CORP -A Price and EPS Surprise


LENNAR CORP -A Price and EPS Surprise | LENNAR CORP -A Quote

Factors to Consider

Overall, a steady job market and historically low mortgage rates have aided the housing market throughout 2016. However, rates hikes and a slowdown in job creation might affect the momentum.

According to the Commerce Department, new single-family home sales fell 1.9% in October from the prior month to a seasonally adjusted annual rate of 563,000. Sales in September were revised down to 574,000 from an earlier estimate of 593,000.

The latest home sales data show some weakness for the days ahead. Nonetheless, the latest homes sales figures, which account for the bulk of purchases, grew 2% in October from the preceding month. This marks the fastest growth since early 2007, as per the National Association of Realtors. Although sales showed a slight decline in summer, it bounced back in September and October.

In the fiscal fourth quarter, the company expects to achieve a backlog conversion of at least 90%. Given the consistently strong demand, we anticipate strong volume trends to continue into the fiscal third quarter. This, along with higher selling prices, should provide ample support to both the top and the bottom line.

Coming to margins, gross margin in the to-be-reported quarter is projected to be approximately 23.25%. Lennar is on track to achieve the lowest SG&A percentage in the company’s history in 2016. For this, its fourth quarter will likely see another 50-basis point reduction sequentially, lagging the third quarter’s 9.3%. Hence, gross margin in the fourth quarter will likely be around 8.8%. Again, lower tax rate, in the range of 33% to 34%, is expected to drive the company’s bottom line in the fourth quarter.

However, Lennar’s shares have lost 6.2% in the last six months, compared to 0.4% growth for the Zacks categorized Building-Residential/Commercial industry. Estimates have remained flat for the current year. Going forward, labor shortages, rising land and labor costs as well as sales slowdown in Houston can keep the housing momentum in check and mar the company's performance.

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.

Earnings ESP: The Earnings ESP for Lennar is 0.00% as both the Most Accurate estimate and the Zacks Consensus Estimate stand at $1.27. 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 #4 (Sell). As it is 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:

Thor Industries, Inc. (THO - Free Report) has an Earnings ESP of +5.13% and a Zacks Rank #1. The company is expected to report first-quarter fiscal 2017 results on Mar 6, 2017.

Rayonier Inc. (RYN - Free Report) has an Earnings ESP of +33.33%. This Zacks Rank #2 company is expected to report fourth-quarter 2016 on Feb 8, 2017. You can see the complete list of today’s Zacks #1 Rank stocks here.

Quanta Services, Inc. (PWR - Free Report) has an Earnings ESP of +1.85% and a Zacks Rank #3. The company is expected to report fourth-quarter 2016 on Feb 23, 2017.

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