Lennar Corporation LEN is set to report fourth-quarter and fiscal 2015 results on Dec 18, before the market opens. Last quarter, the company posted a positive earnings surprise of 21.52%.
In fact, the leading homebuilder has surpassed the Zacks Consensus Estimate in the four trailing quarters bringing the average surprise to 16.12%.
Let’s see how things are shaping up for this announcement.
Factors to Consider
Lennar reported positive sales and earnings surprises in all the three quarters of 2015 reported so far. Strong order trends, pricing gains, steady increases in home deliveries and improved selling, general & administrative leverage boosted sales and profits in 2015. We expect the trend to continue in the fourth quarter as well.
Housing recovery continued at a steady pace in the second and third quarters. In fact, the company believes that the housing market will continue to be driven by “strong and consistent demand” backed by higher job numbers, an improving economy, moderating home price gains, affordable interest/mortgage rates, rising rentals and a limited supply of inventory.
However, Lennar witnessed slower order growth in the Houston region, especially across higher price points. Also, gross margins have been hurt due to rising labor costs as labor shortages are resulting in higher wages. Gross margins in the fourth quarter are expected to increase only slightly on a sequential basis from 24.1%.
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 #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here, as you will see below.
Zacks ESP: The Earnings ESP is -2.68% as the Most Accurate estimate stands at $1.09 while the Zacks Consensus Estimate is pegged higher at $1.12.
Zacks Rank: Lennar’s Zacks Rank #2 increases the predictive power of ESP. However, we need to have a positive ESP to be confident about an earnings beat.
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 momentum.
Stocks to Consider
Here are some companies in the broader construction sector that can be considered as our model shows that they have the right combination of elements to post an earnings beat this quarter:
KB Home KBH, with an Earnings ESP of +3.92% and a Zacks Rank #3.
Owens Corning OC, with an Earnings ESP of +2.33% and a Zacks Rank #3.
TRI Pointe Group, Inc. TPH, with an Earnings ESP of +4.26% and a Zacks Rank #3.
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