Lennar Corporation (LEN) is set to report third-quarter fiscal 2014 results on Sep 17, before the market opens. Last quarter, it posted a positive earnings surprise of 19.61%. Let’s see how things are shaping up for this announcement.
Factors to Consider this Quarter
Lennar has been reporting positive surprises for the last 10 quarters. However, Lennar’s weakness in order, supply shortages and rising costs of building materials, labor and land raises concern for the third quarter 2014 results.
Lennar’s earnings in the last reported quarter were strong on the back of strong pricing and margins. The company has been benefiting from favorable product mix (increased deliveries from higher margin communities), solid land position and reduced incentives. These positive trends are expected to continue in the upcoming quarter.
Lennar remains optimistic about the recovery of the housing market. Third quarter 2014 gross margins are expected in the high 24% range. The backlog conversion ratio is expected to be between 75% and 80% in the upcoming quarter.
The newly created Multi-Family segment is poised to become an important contributor to revenue in the upcoming quarters. There are plans to begin construction of approximately 20 additional apartment communities by the end of 2014, more than double of the present 17 communities. The company expects to sell its first apartment community in the third quarter of 2014.
Similar to another homebuilding company, PulteGroup, Inc. (PHM), Lennar’s order trends were soft in the last reported quarter due to lower demand. However, with demand trends improving in the second half, we believe Lennar should see better volume growth in the third quarter.
Earnings Whisper?
Our proven model does not conclusively show that Lennar is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank of #1, 2 or 3 for this to happen. That is not the case here, as you will see below.
Zacks ESP: The Earnings ESP is 0.00% as both the Most Accurate estimate and the Zacks Consensus Estimate stand at 67 cents.
Zacks Rank #3 (Hold). Lennar carries a Zacks Rank #3 (Hold) which when combined with a 0.00% ESP makes surprise prediction difficult.
We caution against stocks with Zacks Ranks #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.
Other Stocks to Consider
Here are some other companies in the building/ related sector that can be considered as our model shows that they have the right combination of elements to post an earnings beat this quarter:
Boise Cascade Company (BCC), Earnings ESP of +7.69% and a Zacks Rank #2 (Buy).
Ply Gem Holdings, Inc (PGEM), Earnings ESP of +9.38% and a Zacks Rank #3 .
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