Earnings Preview: Lennar Homes

Lennar Corporation (LEN) is a large, relatively diversified homebuilder with a broad geographic footprint. The company focuses on the first-time, move-up, and active adult segments. Lennar is more similar to D.R. Horton (DHI) and PulteGroup (PHM) than they are to luxury builders like Toll Brothers (TOL).

• earnings per share – $0.96
• revenues – $2.584 billion
• EBITDA (earnings before interest, taxes, depreciation, and amortization) – $393.4 million
• gross margin percent – $25.13%

The analyst community will be focused on a few big questions. The biggest one concerns Texas. As oil prices have fallen, we’ve started to see some evidence of distress in some of the smaller energy firms. As oil falls, earnings get hit and these companies are forced to lay people off.

So the biggest question concerns activities in Texas and whether the builders are seeing a spike in cancellation rates, and whether promotions will be needed to move inventory.

Analysts have been somewhat negative about the homebuilding sector as a whole given the worries concerning Texas. You can trade in this sector by investing in the SPDR S&P Homebuilders ETF (XHB).

The second big question concerns traffic patterns and whether the recent decrease in interest rates is having an effect. The big drop in rates has been a pleasant surprise for the homebuilders. Analysts will be looking for evidence that order growth is picking up, and will be watching for any increases in average selling prices.

It would be good to get some clarity about how the spring selling season, which begins in just about a month, will shape up.

The other big question concerns margins. Are the builders beginning to feel cost pressures? The consensus on Wall Street seems to be that price increases have been pushed about as far as they can go. Skilled labor is becoming more expensive. And although energy prices are down, lumber prices are stuck in a range.