What’s Wrong With This Home Builder?

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Lennar Corp. (LEN) Consumer Discretionary - Household Durables | Reports June 21, Before Market Opens

The housing market is an often looked at as an important barometer of the health of the economy. Since the 2008 financial crisis, housing has been closely watched, recently making modest strides on its way to a full recovery. However, with housing starts coming in lower than expected in May, a full fledged recovery might be premature. For homebuilders like Lennar, this could pose a problem this quarter and throughout the rest of the year.

Lennar is scheduled to report its fiscal second quarter earnings tomorrow before the market opens. The Estimize consensus is looking for earnings per share of 91 cents on $2.60 billion, 4 cents higher than Wall Street on the bottom line and $14 million on the top. Compared to a year earlier this represents a 13% increase in earnings and 8% in sales. Despite strong comparisons, the stock typically reacts negatively after an earnings report. 

The company has delivered robust growth in each of the past 7 quarters and this report should make it an 8th. Lennar continues to see strong demand, momentum and volume trends in many of its key reporting segments. Last quarter featured increases in deliveries, new orders and backlog orders. Earnings from its multifamily ventures came in at $12.2 million, compared to a loss from a year earlier.

After high double digit growth in each of the last 7 quarters, Lennar is expected to report single digit gains in Q2. Earnings from Rialto and financial services sectors have both struggled lately, coming in below expectations for the first quarter. Gross margins have been just as bad over the past few quarters, as rising land costs and slowing home price appreciation takes its toll. Troubles in Florida and Houston areas should also keep earnings in check for the quarter to be reported.