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Lennar (LEN) Gears Up for Q4 Earnings: What's in the Cards?

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Lennar Corporation (LEN - Free Report) is slated to report results for fourth-quarter fiscal 2018 (ended Nov 30), before the opening bell on Jan 9.

In the last reported quarter, the company delivered a positive earnings surprise of 17.7%. This Miami-based homebuilder surpassed expectations in three of the trailing four quarters, with the average positive surprise being 68.9%.

How are Estimates Faring?

Let’s take a look at the estimate revision trend in order to get a clear picture of what analysts are thinking about the company prior to the earnings release. The Zacks Consensus Estimate for the quarter to be reported is currently pegged at $1.94, trending downward over the past 60 days. Nonetheless, this reflects an increase of 50.4% from the year-ago earnings of $1.29 per share. Revenues are expected to be $6.53 billion, up 72.5% year over year.

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

Lennar Corporation Price and EPS Surprise

Lennar Corporation Price and EPS Surprise | Lennar Corporation Quote

Key Factors

Indeed, the recent housing data has been exhibiting a decelerating trend, putting up much hurdles for the homebuilders. Labor shortages, trade-driven material price increases, limited land availability, along with increases in new and existing home sale prices have been making things worse. Lennar is not an exception. Higher construction and land costs have been creating pressure on the company’s gross margin over the past few quarters. Gross margin on home sales was 20.3% in the third quarter compared with 22.8% a year ago. Excluding the backlog/construction in progress write-up, gross margin on home sales was 21.9%. The decline was due to higher construction and land costs that were partially offset by an increase in the average sales price of homes delivered.

Nonetheless, Lennar remains well poised to gain from diverse revenue mix, steady top-line performance, above-average order growth and improving SG&A leverage. Courtesy of strong demand, Lennar’s total revenues grew 59.2% year over year in the first nine months of fiscal 2018, on the back of a solid 67% rise in homebuilding revenues. This was primarily driven by a 52% increase in the number of home deliveries and 10% rise in the average sales price of homes delivered.

For the to-be-reported quarter, the Zacks Consensus Estimate for the company’s Homebuilding segment revenues (comprising 92.8% of its total revenues) is pegged at $6.09 billion, depicting an increase from $3.41 billion in the year-ago period and $5.29 billion in the last reported quarter. This improvement is expected to be driven by higher average selling prices.

Meanwhile, during third-quarter earnings call, Lennar adjusted both deliveries and new order guidance in order to primarily reflect the impact of Hurricane Florence, as well as the sluggishness that it has been currently experiencing in the market. The company expects deliveries to be about 14,500 (versus prior expectation of 15,000 units) and new orders at 11,400 (as against 11,600 expected earlier). The company expects community count to be approximately 1,330.

The Zacks Consensus Estimate for fourth-quarter new orders is pegged at 11,204 units, reflecting a 52.3% year-over-year increase but 9.1% sequential decline.

Meanwhile, the company expects the average selling price or ASP to be $420,000 for the fourth quarter, reflecting an increase from $387,000 a year ago and $415,000 in the last reported quarter.

Lennar has maintained its fourth-quarter gross margin guidance of 22.5-22.75%, excluding the write-up of backlog and construction in progress, and still expects to record about $50 million in the fourth quarter, related to return on write-up of backlog and construction in progress. Gross margin on home sales was 22.4% in the year-ago period. Again, SG&A expenses for the quarter are estimated within 8-8.1% compared with 8.4% a year ago.

For the Financial Services segment, the company expects its Financial Services to generate earnings of about $57 million (versus $42.1 million reported in the year-ago period) in the fourth quarter. Meanwhile, the consensus estimate for the segment’s revenues is pegged at $269 million, reflecting 35.2% year-over-year and 14% sequential growth.

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.

Earnings ESP: Lennar has an Earnings ESP of 0.00%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Currently, Lennar carries a Zacks Rank #4 (Sell). We caution against stocks with a Zacks Ranks #4 or 5 (Strong Sell) going into the earnings announcement, especially when the company is witnessing negative estimate revisions. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Stocks With Favorable Combination

Here are some companies in the construction sector, which according to our model have the right combination of elements to post an earnings beat in their respective quarterly reports:

D.R. Horton, Inc. (DHI - Free Report) has an Earnings ESP of +3.61% and carries a Zacks Rank #3. The company is slated to report quarterly numbers on Jan 25, 2019.

Owens Corning Inc. (OC - Free Report) has an Earnings ESP of +3.13% and holds a Zacks Rank #2. The company is expected to report quarterly numbers on Feb 20, 2019.

MasTec, Inc. (MTZ - Free Report) has an Earnings ESP of +0.47% and carries a Zacks Rank #3. The company is expected to report quarterly numbers on Feb 26, 2019.

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Lennar Corporation (LEN) - free report >>

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