Homebuilder Lennar (NYSE:LEN) will report fourth-quarter 2006 financial results on Wednesday, Jan.17, hoping to have something to build on for the future.

What analysts say:

  • Buy, sell, or waffle? Despite the supposed bursting of the homebuilding bubble, six of the 17 analysts covering Lennar say buy, nine rate it a hold, and two have built up the opinion you should sell.
  • Revenues. Revenues for the fourth quarter are expected to grow to $4.2 billion, down 17% from the $5 billion brought in the year before.
  • Earnings. The homebuilder is also expected to swing to a loss, with fourth-quarter earnings coming in at -$0.65 per share, compared to the $3.54 per share profit made the year before.

What management says:
While people still debate whether the homebuilding boom is really over for good for the time being, it can't be denied that the wind has been taken out of the sails of the industry. Lennar delivered a record level of 49,568 new homes in 2006, but new orders were off 3% for the year and, in a sign that things may be rapidly deteriorating, were down 6% for the quarter. Said President and CEO Stuart Miller, "Market conditions continued to weaken throughout the fourth quarter and we have not yet seen tangible evidence of a market recovery."

The homebuilder will be undergoing an "asset-by-asset review" and marking down inventories to better reflect their values. Investors need to be vigilant that in any subsequent "big bath" writedown, Lennar isn't too aggressive so that it is able to show profits earlier than they actually appear. It's planning on taking a $400 million to $500 million charge, which leaves lots of wiggle room for a shaky foundation.

What management does:
The reality of the housing slowdown can be seen in the margin charts below, as the giant sucking sound in homebuilding was really heard in the third quarter. It's obviously going to be continuing this time around as well and housing seems to be a difficult industry to buy into right now. There is simply far too much uncertainty with inventories high, values dropping, and no end in sight.

Margin %
























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:
The housing sector is not ready for a recovery just yet. As high as it has gone over the past five years, it seems to this Fool that it has a bit more to fall before it can be considered bottomed out. As low as its price-to-earnings ratio is -- and at 5 and change it's pretty low on its historical average -- the company is only now just swinging to a loss. Trailing earnings are still twice the amount they were at four years ago and they're not expected to get to 2002 levels until next year.

Those lower earnings would cause Lennar's P/E ratio to soar higher with a constant price like it currently commands. With a cyclical industry like homebuilding, you want to buy in before it's obvious to everyone that earnings will turn up again, but that does not seem to be what's happening now. Again, though, be careful with these homebuilders because of the writedowns they're going to be taking, as that will make it seem there has been a return to profitability that doesn't truly exist.


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  • Ryland Homes (NYSE:RYL)

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