Earnings Preview: Lennar Corp. (LEN)

Lennar Corp. (LEN) announced that it would release its results for the third quarter of 2011 that ended on August 31, 2011 before the market opens on September 19, 2011. Florida-based Lennar earned a profit of 7 cents in the second quarter of fiscal 2011, beating the Zacks Consensus Estimate of 4 cents per share.

In the upcoming quarter, the Zacks Consensus Estimate for Lennar is pegged at 11 cents per share, reflecting an annualized decline of 33%. The downside potential of the estimate, essentially a proxy for future earnings surprises, is 27.27%.

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 236%, implying that the company has beaten the Zacks Consensus Estimate handsomely in the last four quarters. The largest difference was observed in the fourth quarter of fiscal 2010.

Second Quarter Recap

Total revenue in the quarter dropped 6.1% year over year to $764.5 million, due to poor performance across all the company’s reporting segments, except Rialto Investments.

Revenues from the Homebuilding segment declined 6.1% to $662.5 million. This was attributable to a 6.5% drop in home sales to $649.8 million and a 9% decrease in new home deliveries to 2,652 units, partly offset by a 2% increase in the average sales price of homes to $245,000.

Financial Services segment revenues fell 20.3% to $59.4 million. The segment posted operating earnings of $2.5 million in the quarter compared with $13.7 million in the second quarter of fiscal 2010. The significant decline in profit was primarily attributable to lower business volume in the segment’s mortgage and title operations.

Segment revenues rose 23.1% to $42.6 million (which consisted primarily of interest income associated with the segment’s portfolio of real estate loans) from $34.6 million in the prior-year quarter.

Lennar had cash and cash equivalents of $945.2 million from homebuilding as of May 31, 2011 compared with $1.09 billion as of May 31, 2010. Net debt from homebuilding amounted to $2.16 billion as of the above date, reflecting a net debt-to-capitalization ratio of 44.9%.

Estimate Revisions Trend

Earnings estimate for the third quarter of fiscal 2011 is currently pegged at a profit of 11 cents per share. The ongoing weakness in the construction industry induced the analysts to adopt a cautious stance on the company’s performance in the upcoming quarters.

Agreement of Estimate Revisions

Out of the 15 analysts covering the stock for the third quarter of fiscal 2011, only two analysts upgraded the stock in the past 30 days. On the other hand, only one analyst downgraded the stock in the last 7 days.

Magnitude of Estimate Revisions

Following the second quarter earnings release in June, third quarter earnings per share were projected at a profit of 14 cents. However, over the last 60 days, the estimate has fallen to a profit of 12 cents per share. The estimate has dropped by a penny to 11 cents per share in the last 30 days. Since then, the estimate continues to be 11 cents per share.

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 have declined consistently in each of the first three months of the year. The situation is expected to deteriorate further. In addition, house prices have also plunged continuously, driven by an excess supply of homes in the face of depressed demand coupled with tough competition from pre-owned homes.

Moreover, regulations in 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 the risk of default.

But Lennar’s efforts to fight the weakness are worth mentioning. The company has done well in its cost-reduction actions that were undertaken to mitigate the impact of the housing and credit market crisis. Moreover, the gradually improving Rialto Investments is another positive factor for Lennar.

Keeping these in mind, the shares of Lennar are maintaining a Zacks #3 Rank, which translates into a short-term “Hold” rating.

Lennar Corp. (LEN): Free Stock Analysis Report

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