Lennar (LEN) Q4 earnings preview: Home sales to drive top-line

Lennar Corporation (NYSE: LEN) is slated to report its fourth-quarter 2019 earnings results on Wednesday before the market opens. The homebuilder’s bottom line will be hurt by costs and expenses as the housing industry experienced overall uncertainty over the last few years. However, the top line could be benefited by higher home sales.

The home sales were a big driver of mortgage rates, which remained impacted by the change in the interest rates. The Federal Reserve cut interest rates in 2019 to 3.724% from 4.55% at the end of 2018, according to Freddie Mac data. This has helped fuel home sales.

Read: Lennar Q3 2019 Earnings Conference Call Transcript

The top line of Lennar will be benefited by home sales as well as lower interest rates and slower price appreciation. However, the average new orders sales price continues to be hurt by its focus on the entry-level market and the first time homebuyer. The company continues to believe that the basic underlying housing market fundamentals of low unemployment, higher wages, and low inventory levels.

The margins are anticipated to improve steadily throughout the remainder of the year as prices remain stable and incentives continue to subside. The company expects to generate strong cash flow for the remainder of 2019 and into 2020 and to continue to use excess cash flow to pay down debt while opportunistically repurchasing stock.

Analysts expect the company’s earnings to dip by 21.50% to $1.90 per share while revenue will rise by 1.80% to $6.58 billion for the fourth quarter. The company has surprised investors by beating analysts’ expectations thrice in the past four quarters. The majority of the analysts recommended a “strong-buy” or “buy” rating with an average price target of $65.93.

Read: KB Home Q4 earnings preview

For the third quarter, Lennar reported better-than-expected earnings and revenue driven by higher home sales. New orders grew by 9% to 13,369 homes while new orders dollar value rose by 3% to $5.2 billion. Homebuilding revenue increased by 3% while financial services revenue fell by 13%.

Revenues from home sales grew 2% to $5.3 billion for the third quarter, mainly due to a 7% increase in the number of home deliveries. However, the average sales price of homes delivered dropped to $394,000 from $415,000 last year, due to a shift to lower-priced communities as well as higher sales incentives.

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