Miami-based homebuilder, Lennar Corporation LEN is set to report third-quarter fiscal 2016 results on Sep 20, before the market opens. Last quarter, it posted a positive earnings surprise of 9.20%. In fact, the company has recorded positive earnings surprises in all of the past four quarters, with an average surprise of 14.98%.
Let’s see how things are shaping up for this announcement.
Factors to Consider
New home sales were up unexpectedly to an almost nine-year high in July as demand for new homes picked up amid a recovering economy. Lennar expects the backlog conversion ratio to be around 75% in the fiscal third quarter. In the fiscal fourth quarter, the company still expects to achieve a backlog conversion of at least 90%. Given consistently strong demand, we anticipate strong volume trends to continue into the fiscal third quarter. This, along with higher selling prices, should provide ample support to both the top and the bottom line.
That said, Lennar needs to watch out for its gross margins, which have been weak for several quarters now due to rising land costs amid moderating home price growth. For the fiscal third quarter, the company expects gross margins to be between 22.5% and 23%.
Again, the company has a high debt burden. As of May 31, 2016, Lennar had a total debt of $857.6 million, compared with $792.9 million as of Nov 30, 2015.
For the fiscal third quarter, the Zacks Consensus Estimate for earnings stands at 88 cents, reflecting an 8.7% year-over-year decrease. Meanwhile, our estimate for revenues is pegged at $2.66 billion, implying 6.9% growth.
Our proven model does not conclusively show that Lennar is likely to beat earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) for this to happen. That is not the case here, as you will see below.
Zacks ESP: The Earnings ESP for Lennar is 0.00% as both the Most Accurate Estimate and Zacks Consensus Estimate stand at 88 cents.
Zacks Rank: Although Lennar’s Zacks Rank #3 increases the predictive power of ESP, the company’s ESP of 0.00% makes surprise prediction difficult.
Note that we caution against stocks with a Zacks Rank #4 or #5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing a negative estimate revisions momentum.
Stocks to Consider
Here are some companies in the construction sector that can be considered as our model shows that they have the right combination of elements to post an earnings beat in their upcoming releases:
CalAtlantic Group, Inc. CAA has an Earnings ESP of +4.17% and a Zacks Rank #3. The company is expected to report third-quarter 2016 results on Nov 2.
Watsco Inc. WSO has an Earnings ESP of +3.70%. This Zacks Rank #3 company is expected to report third-quarter 2016 results on Oct 25. You can see the complete list of today’s Zacks #1 Rank stocks here.
RPM International Inc. RPM has an Earnings ESP of +1.24% and a Zacks Rank #3. The company is expected to report first-quarter fiscal 2017 results on Oct 5.
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