Lennar (LEN) To Report Q1 Earnings: What's In The Cards?

Lennar Corporation (NYSE:LEN) is slated to report first-quarter fiscal 2018 results (ending Feb 28) before market open on Apr 4.

Last quarter, the company delivered a negative earnings surprise of 14%. This Miami-based homebuilder, however, surpassed expectations in three of the trailing four quarters, the average being 4.2%.

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

Factors at Play

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.

According to the Zacks Consensus Estimate, the company’s Homebuilding segment revenues (comprising almost 88.6% of total revenues) of $2.3 billion are likely to increase from $2 billion in the year-ago period but decrease from $3.4 billion reported in the prior 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 expects a backlog conversion ratio of approximately 65-70% for the to-be-reported quarter. The company’s order trend (in units) also remained solid, growing 12% in the last reported quarter and 11% in fiscal 2017.

The Financial Services segment is also performing well in tandem with its homebuilding operations and innovating new products such as recently announced creative student-loan program. However, the segment is likely to register a significant decline in refinanced volume that impacted 2017. This will likely continue to impact the first half of fiscal 2018. Because of this headwind, first quarter and second quarter are expected to result in lower year-over-year earnings. The consensus estimate for the segment’s revenues of $161 million reflects 19.1% sequential decline. However, it is expected to grow from $148 million recorded in the year-ago period.

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 complementary long-term growth opportunities.

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 (bps) year over year in both the fourth quarter and in 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.

Nonetheless, Lennar’s diligent efforts 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. As a percentage of revenues from home sales, SG&A expenses contracted to 9.2% in the fiscal 2017 from 9.4% in the year-ago period, due to improved operating leverage as a result of an increase in home deliveries.

The Zacks Consensus Estimate for first-quarter earnings is pegged at 82 cents, reflecting an increase of 39% year over year. Meanwhile, the same for revenues is pegged at $2.65 billion, implying 13.5% increase.

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 — to increase the odds of 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 0.00%.

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.

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.

Lennar Corporation Price and EPS Surprise

Lennar Corporation Price and EPS Surprise | Lennar Corporation Quote

Stocks to Consider

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

PulteGroup, Inc. (NYSE:PHM) has an Earnings ESP of +4.55% and a Zacks Rank #3. The company is slated to report quarterly results on Apr 24. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Potlatch Corporation (NASDAQ:PCH) has an Earnings ESP of +5.11% and a Zacks Rank #1. The company is expected to report quarterly results on Apr 25.

M.D.C. Holdings, Inc. (NYSE:MDC) has an Earnings ESP of +1.89% and a Zacks Rank #2 (Buy). The company is expected to report quarterly results on May 8.

Investor Alert: Breakthroughs Pending

A medical advance is now at the flashpoint between theory and realization. Billions of dollars in research have poured into it. Companies are already generating substantial revenue, and even more wondrous products are in the pipeline.

Cures for a variety of deadly diseases are in sight, and so are big potential profits for early investors. Zacks names 5 stocks to buy now.

Click here to see them >>