Will Low Mortgage Rates Aid Lennar’s (LEN) Q3 Earnings?

Lennar Corporation LEN is slated to report results for third-quarter fiscal 2020 (ended Aug 31) after the closing bell on Sep 14.

In the last reported quarter, the company’s earnings topped the Zacks Consensus Estimate by 27.9% but revenues missed the same by 0.03%. Notably, this Miami-based homebuilder surpassed earnings expectations in nine of the trailing 10 quarters.

On a year-over-year basis, earnings grew 27%. The results mainly benefited from effective cost control and focus on making its homebuilding platform more efficient, which in turn resulted in higher operating leverage. However, revenues decreased 5% due to lower average sales price or ASP of homes delivered.

Lennar Corporation Price and EPS Surprise

Lennar Corporation Price and EPS Surprise

Lennar Corporation price-eps-surprise | Lennar Corporation Quote

Trend in Estimate Revision

For the quarter to be reported, the Zacks Consensus Estimate for earnings per share has been unchanged at $1.51 over the past 60 days. The estimated figure indicates a decrease of 5% from $1.59 per share reported in the year-ago quarter. The consensus mark for revenues is pegged at $5.33 billion, suggesting a 9% decrease from the year-ago reported figure of $5.86 billion.

Let’s see how things have shaped up for this announcement.

Factors to Note

Lennar’s fiscal third-quarter Homebuilding revenues (accounting for 93.4% of total revenues) are expected to have decreased from the year-ago level due to lower deliveries, given disruptions caused by the coronavirus outbreak in the United States. During COVID-19-led shutdown period, Lennar slowed land purchases, land development and starts. However, as sales started to recover, the company restarted land development and starts. Accordingly, it expects to have fewer deliveries in the fiscal third and fourth quarters because of the mid-March through April stall.

Although the company — which shares space with PulteGroup PHM, D.R. Horton DHI and Toll Brothers TOL in the Zacks Building Products – Home Builders industry — built homes and worked remotely in the quarter to be reported, shortage of building lots might have impacted sales. Also, lower revenues in Lennar’s ancillary businesses may have added to the woes.

Nonetheless, lower mortgage rates and demand for affordable housing from multiple demographic groups are likely to have given a boost to its order growth. The company has been shifting the business mix to lower-priced homes. This is expected to have boosted its sales absorption pace to some extent.

The Zacks Consensus Estimate for the company’s Homebuilding revenues is pegged at $5.11 billion, which indicates a decrease of 6.1% from $5.4 billion in the year-ago period but a 3.2% increase from $4.9 billion in the last reported quarter.

For the fiscal third quarter, Lennar expects deliveries in the range of 13,200-13,400 homes, indicating a decline from the year-ago reported figure of 13,522. The consensus estimate for deliveries for the to-be-reported quarter is currently pegged at 13,315 homes, indicating a decrease of 1.5% from a year ago but a 5.1% increase sequentially. The company expects ASP within $380,000-$385,000, suggesting a decline from $394,000 a year ago. The consensus estimate for ASP of homes delivered is pegged at $382,000, indicating a 3% decline from the year-ago period and 3.3% sequentially. It expects new orders in the 12,800-13,000 range, implying a decline from 13,369 in third-quarter fiscal 2019.

From the margins perspective, lower average sales prices have been threatening Lennar’s margins. The company’s focus on targeting more first-time homebuyers and lower-priced homes has been impacting margins. This is likely to have hampered its performance in the quarter to be reported. Nonetheless, Lennar has been focusing on controlling construction costs and managing sales price prudently, which may have benefited gross margin in the fiscal third quarter. The company expects homebuilding gross margin in the 21.5-21.75% range, pointing to an increase from 20.4% a year ago.

Again, Lennar has been focused on continuous improvement in the SG&A (selling, general and administrative) line owing to operating leverage and investments in technology. The company expects SG&A expenses, as a percentage of home sales, within 8.3-8.5%. A year ago, the metric was recorded at 8.3%.

What the Zacks Model Unveils

Our proven model does not conclusively predict an earnings beat for Lennar this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat. But that’s not the case here.

Earnings ESP: The company 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, Lennar carries a Zacks Rank #2.

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

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PulteGroup, Inc. (PHM): Free Stock Analysis Report

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D.R. Horton, Inc. (DHI): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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