Can Lennar Earnings Stay Ahead of Homebuilder Rivals?

Lennar (LEN 1.51%) will release its quarterly report on Tuesday, and investors are looking at new headwinds for the homebuilding sector that have led them to send share prices down sharply in recent months. Yet the bigger question is whether Lennar earnings will see a hiccup in growth from higher mortgage rates, or if home-buyers will prove more resilient in their purchasing activity.

Lennar has nationwide scope in its homebuilding activity, with a substantial presence on both coasts as well as in Texas and certain select areas of the nation's interior. The boost in home prices lately has helped the company recover from the worst of the housing bust. But rivals Toll Brothers (TOL 2.25%) and D.R. Horton (DHI 0.99%) have analysts expecting brief but substantial dips in earnings this year before growth resumes next year. Those looking at Lennar's potential results share the same concerns. Let's take an early look at what's been happening with Lennar over the past quarter and what we're likely to see in its report.

Stats on Lennar

Source: Yahoo! Finance.

Can Lennar earnings keep surprising investors this quarter?
In recent months, analysts have had mixed views on Lennar earnings. They've cut August-quarter estimates by $0.06 per share, but they've increased their projections for the full 2013 fiscal year by four times that amount. The stock has had choppy performance, falling 7% since mid-June.

Lennar's most recent earnings release explains how the huge jump in its stock over the past two years has made it tough for the homebuilder to impress investors. During the May quarter, Lennar saw revenue rise 53%, with 39% greater home deliveries and a 13% rise in average sales prices. New-home orders and backlogs both showed huge jumps, even as Lennar was able to reduce its sales incentives without hurting its activity levels. Yet even with all those good results, Lennar's stock didn't really react to the news. That's similar to the experience Toll Brothers investors have had, as first-half revenue posted a similar 35% jump, yet like Lennar, Toll Brothers' stock is down from its May highs.

One issue that's weighing on Lennar and its peers is the fact that home sales remain well below their levels from the housing boom. For Lennar, quarterly sales have been running at between a quarter and a third of their boom-time highs. That's fairly consistent with the pace of its peers' recoveries, although D.R. Horton saw a big bump during the first quarter of 2013. Hovnanian's (HOV 2.05%) similar increase during early 2013 also shows how important it is for Lennar to keep pace with its peers to avoid seeing its business deteriorate.

Finding good building lots is another potential problem. As Lennar CEO Stuart Miller said recently, "[T]here are too few dwellings for a growing population and for normalized household formation," and surveys from the National Association of Home Builders point to scarce supplies of suitable lots for residential construction.

In the Lennar earnings report, watch to see what if any impact rising mortgage rates have on sales activity. If homebuilders continue to get good buying activity from would-be homeowners despite higher financing costs, then Lennar's recent share-price drop could prove to be a big bargain opportunity.

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