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

We expect Lennar Corporation LEN to beat expectations when it reports fourth-quarter fiscal 2017 results on Jan 10, before the market opens.

Last quarter, the company delivered a positive earnings surprise of 4.95%. This Miami-based homebuilder also surpassed expectations in each of the trailing four quarters, the average beat being 9.10%.

Notably, Lennar’s diversified line of home offerings for first-time, move-up and active adult homebuyers and positive housing market fundamental are positives for this leading homebuilder in the United States.

In fact, the company has been reporting solid top-line numbers and the trend is expected to continue in the soon-to-be-reported quarter as well, owing to the strong demand for homes, favorable job market and impressive economic conditions (read more: Will Higher Housing Demand Drive Lennar's Q4 Revenues?). However, weather-related issues might impact the sales conversion to some extent. Going forward, Lennar anticipates the rebuilding effort to drive higher demand for new homes.

According to the Zacks Consensus Estimate, the company’s Homebuilding segment revenues (comprising almost 88.5% of total revenues) of $3.2 billion are likely to increase 11.4% sequentially and 6.9% year over year. This improvement is expected to be driven by higher average selling prices and the delivery of a significant portion of the backlog.

For the final quarter of fiscal 2017, the company expects deliveries to be in the range of 8,200-8,300 compared with 8,228 in the year-ago quarter and 7,598 in the preceding one.

On the flip side, Lennar, like other renowned homebuilding companies, has been under pressure owing to rising land and labor costs that are threatening margins. While labor shortages are leading to higher wages, land prices are increasing due to limited availability.

Lennar’s gross margin on home sales decreased 90 basis points or bps year over year in the first nine months of fiscal 2017. The decline was primarily due to an increase in construction and land costs per home. This trend is unlikely to change in the to-be-reported quarter.

For the fourth quarter, the company expects gross margin in the range of 22-22.25%. This reflects a decline of approximately 130-105 bps from the year-ago level of 23.3%. The downside might be largely due to higher input costs, besides less sales conversion owing to weather-related issues (read more: Will Higher Costs Weigh on Lennar's Q4 Gross Margin?).

Nonetheless, Lennar’s diligent effort to improve its operating efficiency via digital marketing efforts, dynamic pricing tool and other technology initiatives are expected to offset the headwinds, thereby driving growth for this homebuilder. In this regard, the company is working hard to improve its SG&A expenses via operating leverage and investments in technology. SG&A expenses, as a percentage of home sales, are expected to be between 8.5% and 8.6% for the quarter compared with 8.7% a year ago.

The Zacks Consensus Estimate for fourth-quarter earnings is pegged at $1.50, reflecting an increase of 11.9% year over year. Meanwhile, the same for revenues is pegged at $3.62 billion, implying a 7.3% increase.

Here is what our quantitative model predicts.

Lennar has the right combination of the two key ingredients — a positive Earnings ESP and a Zacks Rank #3 (Hold) or higher — for an earnings beat. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks ESP: Lennar has an Earnings ESP of +1.08%.

Zacks Rank: Lennar carries a Zacks Rank #3, which increases the predictive power of ESP.

Conversely, 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.

Other Stocks to Consider

Here are a few other companies in the Zacks Construction sector that, according to our model, have the right combination of elements to post an earnings beat this quarter.

KB Home KBH has an Earnings ESP of +1.37% and a Zacks Rank #3. The company is slated to report quarterly results on Jan 10, 2018. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Louisiana-Pacific Corporation LPX has an Earnings ESP of +6.90% and a Zacks Rank #2. The company is expected to report quarterly results on Feb 14, 2018.

Boise Cascade Company BCC has an Earnings ESP of +14.29% and a Zacks Rank #3. The company is expected to report quarterly results on Feb 23, 2018.

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