Earnings Preview: Lennar Corp.

Lennar Corp. (LEN) announced that it will release its second quarter 2011 results before the market opens on June 23, 2011. Miami, Florida-based Lennar Corp. earned a profit of 14 cents per share in the first quarter, comprehensively beating the Zacks Consensus Estimate of a loss of 6 cents per share.

For the upcoming quarter, the Zacks Consensus Estimate for Lennar Corp. is pegged at a profit of 4 cents per share, reflecting an annualized decline of 79%. The upside potential for the estimate, which can essentially be viewed as a proxy for future earnings surprises, is 25%.

With respect to earnings surprises, the company significantly outdid the Zacks Consensus Estimate in the trailing four quarters. This is reflected in the average earnings surprise of 944.5%, with the highest generated in the second quarter of last fiscal.

First Quarter Recap

Lennar made a profit of $27.4 million or 14 cents per share in the first quarter of fiscal 2011 compared with a loss of $6.5 million or 4 cents per share in the year-ago quarter, driven by higher revenues generated from the company’s Rialto Investments segment. Total revenue in the quarter spiked 3% to $558 million.

Revenues in the homebuilding segment declined 10% to $466.7 million. This was attributable to an 11% fall in home sales on the back of a 7% decrease in average sales price and a 4% dip in new home deliveries. Home deliveries decreased across all the segments, except East, while average sales price fell primarily in the company’s West segment.

Revenues in the Financial Services segment grew 8% to $57.7 million. The increase in revenues was primarily attributable to higher activities in the segment’s mortgage operations and reduced costs in the segment’s title operations.

Revenues in the segment rose significantly to $33.6 million (which consisted primarily of accruable interest income associated with the segment’s portfolio of real estate loans) from $301,000 in the prior-year quarter.

Lennar had cash and cash equivalents of $1.01 billion as of February 28, 2011 compared with $732.4 million a year ago. Net debt amounted to $2.12 billion as of the above date, reflecting a debt to capitalization ratio of 44.5%.

Estimate Revisions Trend

Earnings estimate for the second quarter of fiscal 2011 is currently pegged at a profit of 4 cents per share. The evidence of sluggish growth in the U.S. construction and homebuilding industry keeps the analysts at bay regarding the stock.

Agreement of Estimate Revisions

Out of the 16 analysts covering the stock for the second quarter of fiscal 2011, none raised their estimates over the last 30 days. However, the weak industry performance has forced one analyst to reduce its estimate over the same period.

Magnitude of Estimate Revisions

Just following the first quarter earnings release in March, the second quarter earnings per share were projected to be a profit of 12 cents per share. However, in the last 60 days, the estimate had been revised downward to a profit of 5 cents per share.

The 5 cents per share estimate remained unchanged over the last 30 days. However, the estimate once again dropped by a penny to a profit of 4 cents per share over the past 7 days and currently remained unchanged at it.

Our Take

A depressed housing industry is the biggest concern for any homebuilder including Lennar. Besides, there is no sign of a speedy recovery. Home sales declined consistently in each of the first three months of the year. The situation is feared to deteriorate further.

In addition, house prices also plunged continuously, driven by an excess supply of homes in the face of depressed demand and tough competition from the pre-owned homes.

Moreover, regulations on the secondary mortgage market- as well as a decline in demand for mortgage-backed securities, could force Lennar to pay its borrowers from its own reserves. This would lower its cash reserves and increase its exposure to defaulting risk.

Thus, keeping these in mind, the shares of Lennar are maintaining a Zacks #4 Rank, which translates into a short-term Sell rating.

LENNAR CORP -A (LEN): Free Stock Analysis Report

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