Lennar Corporation: Earnings Preview

Mar.29.11 | About: Lennar Corporation (LEN)

Lennar Corp. (NYSE:LEN) announced that it would release its results for the first quarter of 2011 before the market opens on March 29, 2011. Florida-based Lennar earned a profit of 15 cents in the fourth quarter and 48 cents in the full fiscal 2010, beating the Zacks Consensus Estimates of 3 cents and 34 cents, respectively.

In the upcoming quarter, the Zacks Consensus Estimate for Lennar is pegged at a loss of 6 cents per share, reflecting an annualized decline of 44%.

With respect to earnings surprises, the company outdid the Zacks Consensus Estimate in the trailing four quarters. This is reflected in the average earnings surprise of 730%, implying that the company has beaten the Zacks Consensus Estimate handsomely the last four quarters. The largest difference was observed in the first quarter of fiscal 2010 followed by the second, fourth and third quarters, respectively.

The current Zacks Consensus Estimate for the first quarter is a loss of 6 cents while that for full fiscal 2011 is a profit of 60 cents. The downside potential of these estimates, essentially a proxy for future earnings surprises, is 50% and 38%, respectively.

Fourth Quarter and Fiscal 2010 Review

Lennar’s net income for the quarter rose significantly to $28.3 million or 15 cents per share from the prior-year net loss of $284.9 million or $1.56 per share. The realized figures excluded tax benefits of about $3.7 million during the fourth quarter of fiscal 2010 and that of $320.5 million during the fourth quarter of fiscal 2009.

However, revenues declined 6% year over year to $860.1 million driven by depressed results from the homebuilding segment despite the improved performances by the Lennar Financial Services and the Rialto Investments.

Homebuilding revenues dropped 11% to $761.4 million year over year led by a 12% fall in deliveries accompanied by a 5% decrease in home orders. However, revenues realized from the Financial Services were $79.1 million, up 38% from last year’s $57.3 million and that from Rialto Investments were $79.1 million as compared with zero contribution by the segment a year ago.

Lennar’s full year adjusted net income was 48 cents per share, excluding tax benefits worth $25.7 million. Full year revenues were marginally down to $3.07 billion. Rialto Investments turned out to be a success for the company, thus inspiring an almost $500 million investment in various assets involving the segment.

The company’s cost minimizing efforts also bore fruit leading to a 25% reduction in direct cost over the full year leading to improved gross and operating margins in fiscal 2010.Gross margins on home sales were $128.7 million (including valuation adjustments of $22.3 million) or 17.7% in the fourth quarter of 2010 compared with $92.2 million (including valuation adjustments of $55.5 million) or 11.1% in the corresponding period of fiscal 2009. Besides, operating income rose substantially to $100 million from a year-ago loss of $676 million.

Estimate Revisions Trend

Estimates have remained stable over the past 30 days, reflecting analysts’ cautiousness on the stock. However, over the last 60 days, the estimates took a slight dip of a penny each in the first, second and full fiscal 2011. The Zacks Consensus Estimate for the first quarter is a loss of 6 cents per share, which was 50% higher than the year-ago loss of 4 cents.

The second quarter is expected to make a profit of 12 cents, translating into a growth of 75%. For full fiscal 2011, the Zacks Consensus Estimate is 60 cents of profit implying a growth rate of 25%.

Agreement of Estimate Revisions

Each of the 17 analysts covering the stock for the first quarter of 2011 has kept his estimate unchanged in the last 7 days. However, only one has made an upward revision to its estimate for the first quarter in the last 30 days.

Similar trends have been observed for full fiscal 2011 as well. None of the 17 analysts covering the stock have made a change to the estimate in the last 7 days while only one raised his estimate in the last 30 days. A weak housing with a very slow recovery has forced the analysts to remain cautious on the stock.

Magnitude of Estimate Revisions

Earnings estimates remained unchanged in the last 30 days for each of the first and second quarters and also for the current year.

Out Take

Lennar has done well in its efficient 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.

However, a depressed housing industry is the biggest concern for any homebuilder. In addition, there is no sign of a speedy recovery. Thus a poor performance in terms of housing is very likely for Lennar. This may pull down the total performance of the company despite its inspiring results in the other two sectors.

As a result, Lennar Corp. shares are maintaining a Zacks #3 Rank, which translates into a short-term Hold rating. We also give the stock a Neutral recommendation in the long term.