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Will Higher Housing Demand Aid Lennar's (LEN) Q2 Earnings?

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Lennar Corporation (LEN - Free Report) is slated to report results for second-quarter fiscal 2018 (ended May 31) before the opening bell on Jun 26.

In the last reported quarter, the company delivered a positive earnings surprise of 20.7%. This Miami-based homebuilder surpassed expectations in three of the trailing four quarters, with the average being 7.1%.

Notably, Lennar’s diversified line of home offerings for first-time, move-up and active adult homebuyers, and positive housing market fundamentals prove favorable for this leading homebuilder in the United States.

Factors at Play

Although higher prices, mortgage rates and supply shortages are taking a toll on the housing industry of late, Lennar has been reporting solid top-line numbers and the trend is expected to continue in the soon-to-be-reported quarter as well, owing to strong demand for homes, favorable job market and impressive economic conditions.

According to the Zacks Consensus Estimate, the company’s Homebuilding segment revenues (comprising almost 89.3% of total revenues) of $4.7 billion are likely to increase from $2.9 billion in the year-ago period and $2.7 billion recorded in the prior reported quarter. This improvement is expected to be driven by higher average selling prices and the delivery of a significant portion of the backlog. The company’s new order trend (in units) also remained solid, growing 30% in the last reported quarter and 11% in fiscal 2017.

The Financial Services segment is also performing well in tandem with its homebuilding operations and innovation of new products such as recently announced creative student-loan program. The company expects the segment’s second-quarter profit to be between $45 million and $48 million for the to-be-reported quarter. Meanwhile, the consensus estimate for the segment’s revenues is pegged at $288 million, reflecting 68.4% sequential growth.

While Lennar’s Homebuilding and Financial Services divisions are the primary drivers of near-term revenues and earnings, its ancillary businesses like Rialto and Multi-Family provide diversification as well as complementary long-term growth opportunities.

On the flip side, Lennar, like other renowned homebuilding companies, has been under considerable pressure owing to rising land and labor costs that are threatening margins. While labor shortages are resulting in higher wages, land prices are increasing due to limited availability.

Lennar’s gross margin on home sales expanded 50 basis points (bps) in the fiscal first quarter but decreased 90 bps year over year in fiscal 2017. The decline was primarily due to an increase in construction and land costs per home. For the second quarter, the company expects gross margin to be in the 21.0-21.6% range compared with 21.1% in the year-ago period. Gross margins are expected to be impacted by 750-800 bps in the second quarter related to the CalAtlantic acquisition.

Overall, Lennar’s diligent efforts to improve operating efficiency via digital-marketing efforts, dynamic pricing tool and other technology initiatives are expected to offset the headwinds, thereby driving growth for this homebuilder. In this regard, the company is working hard to improve its SG&A expenses via operating leverage and investments in technology. As a percentage of revenues from home sales, SG&A expenses contracted 60 bps to 9.7% in the fiscal first quarter, due to improved operating leverage as a result of an increase in home deliveries. However, the impact of purchase accounting related to CalAtlantic acquisition is expected to hurt margins and thereby the bottom line of the company.

The Zacks Consensus Estimate for second-quarter earnings is pegged at 45 cents, reflecting a decrease of 50.6% year over year. That said, the same for revenues is pegged at $5.23 billion, implying 60.4% growth.

Lennar Corporation Price and EPS Surprise


Lennar Corporation Price and EPS Surprise | Lennar Corporation Quote

What Does the Zacks Model Unveil?

Lennar does not have the right combination of the two key ingredients — a positive Earnings ESP and a Zacks Rank #3 (Hold) or higher — to increase the odds of an earnings beat. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks ESP: Lennar has an Earnings ESP of 0.00%.

Zacks Rank: Lennar carries a Zacks Rank #3, which increases the predictive power of ESP. However, we also need to have a positive ESP to be confident of an earnings surprise.

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

Stocks to Consider

Here are some companies in the Zacks Construction sector that according to our model, have the right combination of elements to post an earnings beat in their respective quarters to be reported.

Masco Corporation (MAS - Free Report) has an Earnings ESP of +1.70% and a Zacks Rank #3. The company is expected to report quarterly results on Jul 26.

Vulcan Materials Company (VMC - Free Report) has an Earnings ESP of +1.29% and a Zacks Rank #3. The company is expected to report quarterly numbers on Aug 1.

Century Communities, Inc. (CCS - Free Report) has an Earnings ESP of +15.47% and a Zacks Rank #3. The company is expected to report quarterly results on Aug 2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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