Foolish Forecast: Lots to Choose From With Lennar

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Homebuilder Lennar (NYSE: LEN) will report second-quarter 2007 financial results on Tuesday, June 26. Let's see what the company's hammered out.

What analysts say:

• Buy, sell, or waffle? Of the 13 analysts covering Lennar (that's three less than last time out), four say "buy," six recommend a hold, and three say "Put the house on the market" with a sell rating.
• Revenues. Sales are expected to continue their decline as the housing industry slips further into the sinkhole. Analysts expect a 44% slide in revenue, down to $2.58 billion.
• Earnings. Similarly, profits are expected to evaporate to just $0.08 per share, down 96% from the $2.00 a stub the builder recorded a year ago. Still, it's a profit.

What management says:
When market forces turn against you, a strong financial position can help you turn a weather eye toward the future. That's the thinking behind President and CEO Stuart Miller's "balance sheet first" strategy. "Since early 2006, we have focused on fortifying our balance sheet by carefully managing inventory levels (converting both land and home inventory to cash) and significantly reducing land purchases and starts," Miller said. "Concurrently, we have adjusted our land assets where appropriate while we have written-off option deposits and pre-acquisition costs on land we no longer desire to close."

Lennar also closed on its LandSource lot option joint venture, which gave it an immediate $700 million cash infusion; it will also provide $170 million of earnings this year and potentially $400 million in the future. The new partner will also bring to the table $2.6 billion worth of assets and 4,000 homesites that were repriced to reflect current market values.

What management does:
While it's not surprising that homebuilders like Lennar, Hovnanian (NYSE: HOV), and Toll Brothers (NYSE: TOL) have had to reduce housing prices because they're selling fewer homes, what does raise eyebrows is the value of the incentives they need to offer to induce buyers to actually close on the properties. Lennar reported that incentives more than tripled last quarter, rising to more than $45,000 per home delivered, compared to just more than $13,000 offered the year before, drastically cutting into gross margins, which fell 930 basis points.

Margin	02/06	05/06	08/06	11/06	02/07
Gross	15.7%	15.3%	13.8%	9.8%	7.4%
Operating	15.4%	14.9%	13.2%	8.6%	5.8%
Net	9.7%	9.2%	8%	3.7%	2.6%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Lennar's stock has fallen more than 25% since February, when many analysts had expected to see a rise in home sales because of a spring push. When that didn't materialize, the market blamed various factors, including the subprime mortgage fallout and weather patterns. Housing stocks retreated. Centex (NYSE: CTX), Pulte Homes (NYSE: PHM), and Beazer (NYSE: BZH) have all fallen by like or greater amounts. One homebuilder, Motley Fool Hidden Gems recommendation MDC Holdings (NYSE: MDC), while also declining, has not fallen as hard as the rest.

Without question, the housing industry has been suffering, but the depressed values offered by Lennar and a number of the other homebuilders may present opportunities for the Foolish investor. A keen eye for strong companies in beaten-up industries can provide a solid investment philosophy.

Related Foolishness:

• Foolish Forecast: Lennar Lending a Hand to its Future
• Lennar Kicks Up More Industry Gloom
• Sorrow for the Lost Lennar
• Foolish Fundamentals: Margins

Lennar has earned a one-star rating from Motley Fool CAPS, the new investor intelligence community. You can add your voice to the new stock-rating service by joining today. It's free!

MDC Holdings is a recommendation of Motley Fool Hidden Gems. Discover Tom Gardner and Bill Mann's entire stable of small-cap growth stocks, collectively beating the market by 36 percentage points, with a free 30-day trial subscription.

Fool contributor Rich Duprey does not have a financial position in any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.