Can Lennar Corp. (LEN) Keep the Earnings Streak Alive? - Analyst Blog

Lennar Corporation (LEN) is set to report fourth-quarter and full year 2014 results on Jan 15, before the market opens.

Last quarter, it posted a positive surprise of 16.42%.  Lennar has been posting positive earnings surprise for the past four quarters with an average surprise of 18.77%. Let’s see how things are shaping up for this announcement.

Factors to Consider this Quarter

Lennar expects to continue to perform well despite the housing market recovering at a slow pace, though moving upward in a fairly narrow channel

In the fourth quarter, gross margin is expected to be around 25%. In addition, management expects selling, general and administrative (SG&A) leverage of 25 basis points (bps) and therefore, SG&A ratio could improve as much as 25 bps.

Lennar is performing well on the back of its diverse revenue mix, large land supply, above average order growth, better pricing power and consistently strong profit margins. Moreover, Lennar’s ancillary platforms — Rialto, Multi-Family, FivePoint and Financial Services — are evolving and are expected to contribute meaningfully from 2015/2016.

In 2014, Lennar expects to increase its community count by 15% year over year to a range of 600 to 625. In the year, Lennar expects home closings between 21,000 and 22,000.

With regards to the Financial Services business, profit is expected in the range of $65–$75 million for 2014, down from the 2013 levels due to the lower refinance volume and an overall more competitive environment.

With regards to Rialto, profit is expected between $30 million and $40 million for the year.

The Multi-family segment is likely to report loss in the quarter to account for the overhead expenses in the absence of any sale of apartments. Though the segment is expected to post a loss in 2014, management expects it to begin contributing more meaningfully to earnings in late 2015 to early 2016.

Earnings Whisper?

Our proven model does not conclusively show that Lennar Corporation is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank of #1, 2 or 3 for this to happen. That is not the case here, as you will see below.

Zacks ESP:  The Earnings ESP is 0.00% as both the Most Accurate Estimate and the Zacks Consensus Estimate stand at 97 cents.

Zacks Rank #3 (Hold). Though Zacks Rank #1, 2 or 3 increase the predictive power of ESP, Lennar Corporation’s ESP of 0.00% makes surprise prediction difficult.

We caution against stocks with Zacks Rank #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

Other Stocks to Consider

Here are some other companies in the building/materials sector that can be considered as our model shows that they have the right combination of elements to post an earnings beat this quarter:

PulteGroup, Inc. (PHM) with an Earnings ESP of +2.44% and a Zacks Rank #2 (Buy).

Armstrong World Industries, Inc. (AWI) with an Earnings ESP of +10.71% and a Zacks Rank #2.

Owens Corning (OC) with an Earnings ESP of +2.38% and a Zacks Rank #3.
 

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