How Are Things Shaping Up for Lennar’s (LEN) Q3 Earnings?

Lennar Corporation LEN is slated to report results for third-quarter fiscal 2018 (ended Aug 31), before the opening bell on Oct 3.

In the last reported quarter, the company delivered a positive earnings surprise of 251.1%. This Miami-based homebuilder surpassed expectations in three of the trailing four quarters, the average beat being 65.7%.

Notably, a 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.

Let’s take a look at how the company's results are shaping up for this earnings season.

Revenues

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 on strong demand, favorable job market and impressive economic conditions.

Per the Zacks Consensus Estimate, the company’s Homebuilding segment revenues (comprising 92.8% of total revenues) of $5.16 billion are likely to increase from $2.88 billion in the year-ago period and $5.06 billion in the preceding 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, up 62% in the last reported quarter. The company expects 12,500 new orders (approximately up 12%). The Zacks Consensus Estimate for second-quarter new orders is pegged at 12,579 units, reflecting an increase of 65.3% year over year but a decline of 12.9% sequentially.

Meanwhile, with the addition of CalAtlantic, the company expects the average selling price or ASP to be $410,000 for the third quarter, reflecting an increase from $376,000 a year ago but a decrease from $413,000 in the last reported quarter.

The Financial Services segment is also performing well. The company expects the segment’s profit to be about $60 in the to-be-reported quarter. Meanwhile, the consensus estimate for the segment’s revenues is pegged at $296 million, reflecting a 37.7% year over year and 27.6% 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 long-term growth opportunities.

Gross Margin

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

That said, Lennar has managed to boost its margin in the last reported quarter, courtesy of an increase in the average sales price of homes delivered and volume. The company’s adjusted gross margin on home sales expanded 10 basis points (bps) from the year-ago period in the fiscal second quarter. For the third quarter, the company expects adjusted gross margin in the 21.5-21.75% range compared with 22.8% a year ago. Gross margin is expected to be impacted by 100 bps in the third quarter owing to the CalAtlantic acquisition.

SG&A Expense

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. In this regard, the company is working hard to improve its SG&A expenses via operating leverage and investments in technology. The company expects SG&A expenses as a percentage of revenues to be about 8.7% in the third quarter versus 9.2% a year ago.

Overall Earnings & Revenue Expectations

The Zacks Consensus Estimate for third-quarter earnings per share is pinned at $1.27, reflecting an increase of 19.8% year over year. The same for revenues is pegged at $5.67 billion, implying 73.9% growth.

Overall, Lennar is expected to witness lower gross margin and earnings in the fiscal third quarter owing to merger-related costs. Nonetheless, Lennar’s unwavering focus on improving operating efficiency via digital marketing strategies, dynamic pricing tool and other technology initiatives are expected to counter the headwinds.

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 — which increase the odds of an earnings beat.

Earnings ESP: Lennar has an Earnings ESP of -4.14%.

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. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Meanwhile, 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 a few companies in the Zacks Construction sector that have the right combination of elements to post an earnings beat in the quarters to be reported.

PulteGroup, Inc. PHM has an Earnings ESP of +7.79% and a Zacks Rank #2 (Buy). The company is scheduled to report quarterly results on Oct 23. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

D.R. Horton, Inc. DHI has an Earnings ESP of +1.05% and a Zacks Rank #2. The company is expected to report quarterly results on Nov 8.

Beazer Homes USA, Inc. BZH has an Earnings ESP of +5.70% and a Zacks Rank #3. The company is expected to report quarterly numbers on Nov 13.

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