Lennar (LEN) Gears Up For Q3 Earnings: Is A Beat In Store?

We expect Miami-based homebuilder Lennar Corporation (NYSE:LEN) to beat expectations when it reports third-quarter fiscal 2017 results on Oct 3, before market open. Last quarter, the company delivered a positive earnings surprise of 16.67%. The company also surpassed expectations in each of the trailing four quarters, the average beat being 11.55%.

Lennar Corporation Price and EPS Surprise

Lennar Corporation Price and EPS Surprise | Lennar Corporation Quote

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

Why a Likely Positive Surprise?

Our proven model shows that Lennar is likely to beat earnings because it has the right combination of two key components.

Zacks ESP: Lennar has an Earnings ESP of +0.68%. A favorable Zacks ESP serves as a meaningful indicator of a likely positive earnings surprise. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Lennar currently carries a Zacks Rank #3 (Hold). Note that stocks with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 have a significantly higher chance of beating earnings estimates. Conversely, stocks with a Zacks Rank #4 or 5 (Sell rated) should never be considered going into an earnings announcement.

The combination of Lennar’s favorable Zacks Rank and a positive ESP makes us reasonably confident of an earnings beat.

Factors to Consider

It is important to note that Lennar’s earnings per share in fiscal second quarter decreased 4.2% year over year. Expenses related to Lennar’s acquisition of WCI Communities, Inc. hurt its second-quarter earnings. Again, rising land and construction costs had a negative impact on its gross margin that declined 160 basis points (bps) year over year. Although gross margin improved 40 bps sequentially, the said factors are likely to create some pressure on the to-be-reported quarter’s earnings too. The company expects third-quarter gross margin to be in the range of 21.75-22% against 22.6% in the year-ago quarter.

Lennar recently provided views regarding its fiscal third-quarter deliveries and new orders, post hurricanes, Harvey and Irma. The company said that the hurricanes affected its communities in Texas, Florida, Georgia and South Carolina that represent 40% of Lennar’s annual homebuilding revenues. Hence, the natural disaster is expected to cause delay in home deliveries.

Lennar said that it had 7,610 new orders and 7,598 deliveries for the third quarter that ended Aug 31. This represents an increase of 8% and 12%, respectively, year over year.

Hurricane Harvey impacted about 120 new orders and deliveries during the quarter and is expected to impact about 130 deliveries in the fiscal fourth quarter. Lennar further added that Hurricane Irma could delay about 700 deliveries from the fourth quarter into fiscal 2018.

Nonetheless, Lennar remains optimistic about fiscal 2018 and expects that the rebuilding effort will drive higher demand for new homes next year.

Lennar is one of the best-positioned homebuilders to capitalize on the housing recovery, courtesy of its diverse revenue mix, steady top-line performance, above-average order growth and improving SG&A leverage. Lennar remains focused on continued improvement in the SG&A line from operating leverage and investments in technology. Again, the company’s acquisition of WCI Communities in February is expected to contribute to its top line.

For the fiscal third quarter, the Zacks Consensus Estimate for earnings is pegged at $1.01, reflecting a decrease of 0.3% year over year. Meanwhile, the Zacks Consensus Estimate for revenues is pegged at $3.23 billion, implying a 13.8% increase.

Stocks to Consider

You could consider the following construction stocks that have a positive Earnings ESP and a favorable Zacks Rank for their upcoming releases.

Thor Industries, Inc. (NYSE:THO) has an Earnings ESP of +0.56% and a Zacks Rank #2. The company is slated to report quarterly results on Sep 27, 2017.

Louisiana-Pacific Corporation (NYSE:LPX) has an Earnings ESP of +3.29% and a Zacks Rank #3. The company is expected to report quarterly results on Oct 30, 2017.

Owens Corning (NYSE:OC) has an Earnings ESP of +2.54%. This Zacks Rank #2 company is expected to report quarterly results on Oct 25, 2017. You can see the complete list of today’s Zacks #1 Rank stocks here.

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