Lennar (LEN) to Post Q3 Earnings: How are Things Shaping Up?

Lennar Corporation LEN is slated to report results for third-quarter fiscal 2019 (ended Aug 31) before the opening bell on Oct 2.

In the last reported quarter, the company’s earnings and revenues topped the Zacks Consensus Estimate by 15% and 8.8%, respectively. Notably, this Miami-based homebuilder surpassed earnings expectations in five of the six trailing quarters.

How are Estimates Faring?

Let’s take a look at the estimate revision trend in order to get a clear picture of what analysts are thinking about the company prior to the earnings release.

For the quarter to be reported, the Zacks Consensus Estimate for earnings per share has remained unchanged at $1.32 over the past 60 days. This indicates a decrease of 5.7% from the year-ago earnings of $1.40 per share. Revenues are also expected to decrease 2.6% year over year to $5.52 billion.

Let’s see how things are shaping up for this announcement.

Key Factors

Lennar’s upcoming quarterly results are expected to improve from the fiscal second quarter, given lower mortgage rates, rebound in western markets and continued demand for affordable housing from multiple demographic groups. Notably, as California home sales are trending in a positive direction, Lennar is expected to benefit from higher volume and average selling prices.

Homebuilding: Robust backlog position and increased traffic on the back of improved wage growth as well as lower mortgage rates are expected to be conducive to the company’s Homebuilding revenues (accounting for 93.4% of total revenues).

Lennar expects deliveries in the to-be-reported quarter within 13,000-13,250 units compared with 12,613 units reported a year ago and 12,729 units in the last reported quarter. Average sales price is expected between $385,000 and $390,000 versus $415,000 in the year-ago period and $408,000 in the last reported quarter.

The company expects new orders in the 12,500-12,800 range compared with 12,319 in third-quarter fiscal 2018.

From the margins perspective, rising land and labor costs are threatening Lennar’s margins. The company expects fiscal third-quarter gross margin in the range of 20.25-20.5% (compared with 20.1% in the fiscal second quarter and 20.3% in the year-ago period). The adverse effect of labor shortage in the construction industry has been the strongest headwind faced by Lennar for a while now. This is likely to hamper the quarter to be reported. Higher incentives per home also added to the woes.

Nonetheless, Lennar remains focused on continued improvement in the SG&A (selling, general and administrative) line owing to operating leverage and investments in technology. SG&A expenses, as a percentage of home sales, are estimated within 8.3-8.4% compared with 8.6% a year ago and 8.4% in the fiscal second quarter.

What the Zacks Model Unveils

Lennar does not have the right combination of the two key ingredients — a positive Earnings ESP and a Zacks Rank #3 (Hold) or higher — to increase the odds of an earnings beat.

Earnings ESP: Lennar has an Earnings ESP of 0.00%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Currently, it carries a Zacks Rank #3, which increases the predictive power of ESP. However, the company’s 0.00% ESP makes surprise prediction difficult.

Note that we caution against stocks with a Zacks Ranks #4 or 5 (Sell rated) going into the earnings announcement, especially when the company is witnessing negative estimate revisions.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Stocks With Favorable Combination

Here are some companies in the Zacks Construction sector, which according to our model have the right combination of elements to post an earnings beat in their respective quarters to be reported.

M.D.C. Holdings, Inc. MDC has an Earnings ESP of +8.95% and a Zacks Rank #1.

Toll Brothers Inc. TOL has an Earnings ESP of +1.65% and holds a Zacks Rank #3.

Floor & Decor Holdings, Inc. FND has an Earnings ESP of +0.86% and a Zacks Rank #3.

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