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Lennar (LEN) Up 3.6% Since Last Earnings Report: Can It Continue?

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A month has gone by since the last earnings report for Lennar (LEN - Free Report) . Shares have added about 3.6% in that time frame, underperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Lennar due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Lennar's (LEN - Free Report) Q1 Earnings & Revenues Miss Estimates, Up Y/Y

Lennar Corporation reported first-quarter fiscal 2019 (ended Feb 28, 2019) results, wherein earnings and revenues missed the respective Zacks Consensus Estimate.

Nonetheless, the company believes that the housing market will remain stable in the near term, given declining mortgage rates and moderating home prices in recent times. Lennar stated that underlying housing market fundamentals of lower unemployment, higher wages and low inventory levels remain conducive to the industry.

The company’s first-quarter earnings of 74 cents per share lagged the consensus mark of 75 cents by 1.3%. However, the reported figure increased 39.6% from the year-ago profit level of 53 cents.

Total revenues of $3.87 billion missed the consensus mark of $4.08 billion but increased 29.8% year over year, as the Homebuilding and Multifamily business segments performed well.

Segment Details

Homebuilding: The segment’s revenues increased 36.1% from the prior-year quarter to $3.62 billion, driven by higher number of homes delivered and greater average selling prices. Within the Homebuilding umbrella, home sales constituted $3.61 billion (up 36.2% year over year) and land sales accounted for $13.8 million (up 6.4%).

New home orders increased 23.7% from the year-ago quarter to 10,463. Potential value of net orders increased 23.4% year over year to $4.2 billion.

Home deliveries increased 31% from the prior-year quarter to 8,820, buoyed by higher number of homes delivered across all the regions served by the company, courtesy of a significant increase in volume as a consequence of the CalAtlantic acquisition.

The average sales price of homes delivered was $410,000, reflecting an 4.3% year-over-year increase.

In the quarter under review, backlog fell 1.7% from the year-ago quarter to 17,259 homes. Potential housing revenues from backlog decreased 7.3% year over year to $7.1 billion.

Margins

Gross margin on home sales was 20.1% in the quarter, up 60 bps from 19.5% a year ago. The upside was attributable to an increase in the average sales price of homes delivered, partially offset by higher construction costs.

As a percentage of home sales, SG&A (selling, general and administrative) expenses improved 20 bps to 9.5%. The improvement was due to improved operating leverage, owing to higher home deliveries. Benefits from technology initiatives also added to the positives.

Financial Services: Financial Services revenues increased 26.9% year over year to $143.3 million in the quarter. Operating earnings at the segment were $21.8 million, down from $25.8 million a year ago. The decline was mainly due to the sale of non-core businesses in fiscal first-quarter 2019, and a decrease in Rialto Mortgage Finance securitization revenues as a result of lower volume and margins.

Lennar Multi-Family: Lennar Multi-Family revenues of $97.4 million increased 4.4% from the prior-year quarter. The segment generated operating earnings of $6.8 million in the quarter versus a loss of $1.2 million in the year-ago period.

Financials

Lennar Homebuilding’s cash and cash equivalents totaled $852.6 million as of Feb 28, 2019, down from $1.34 billion on Nov 30, 2018. Net homebuilding debt of the company was $8.4 billion as of Nov 30, 2019 compared with $7.2 billion on Nov 30, 2018.

Fiscal 2019 Guidance

The company expects deliveries to be about 50,000-51,000 units. Average sales price or ASP is expected between $400,000 and $405,000. Lennar expects gross margin in the range of 20.5-21%.

SG&A expenses for the year are estimated within 8.3-8.5%.

The company expects Financial Services to generate earnings within $185-$190 million. Multifamily is expected to generate about $5-$10 million of profits during the year.

The company remains on track to meet its prior guidance of $380 million for merger synergies, with 265 million of this from direct construction cost savings, and 115 million from corporate and SG&A savings.

Q2 Guidance

New orders are expected between 14,000 and 14,300; deliveries within 11,700-12,000 homes; ASP between 400,000 and 405,000; gross margin in the range of 20-20.5%; and SG&A in the band of 8.5-8.6%. The company expects earnings to be between $1.70 and $1.20 per share for the quarter.

The company expects Multifamily to incur $5 million loss. Meanwhile, Financial Services earnings are expected between 45 million and 47 million.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -14.95% due to these changes.

VGM Scores

At this time, Lennar has a poor Growth Score of F, however its Momentum Score is doing a lot better with a C. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Lennar has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.


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