Lennar Posts Lower Profit

Posted 27 September 2006 @ 09:42 am EET     Print     Reprint     E-Mail     Comments

NEW YORK (AP) - A steeper-than-expected drop in the U.S. housing market pushed Lennar Corp.'s quarterly profit down 39 percent and prompted the home builder on Tuesday to slash its forecast for the current period.

For the third quarter ended on August 31, earnings fell to $206.7 million, or $1.30 per share, from $337.3 million, or $2.06 per share, a year earlier.

The latest results included a gain of 7 cents per share from financial services operations.Earlier this month, the Miami-based company cut its quarterly earnings outlook to between $1.25 and $1.35 per share from a prior range of $1.90 to $1.95. Analysts lowered their estimates to an average of $1.27 after the warning.

On Tuesday, the company cut its fourth-quarter forecast to between $1 and $1.30 a share from a range of $2.55 to $2.60, saying uncertainty with the housing slowdown and continuing high cancellations precluded a more precise outlook.

But analysts had not been sold on the company's previous forecast. Wall Street on average had pegged the quarterly number at $1.58 per share, according to Reuters Estimates."Everybody knew that it had gotten a bit worse" said BB&T Capital Markets analyst Todd Vencil, whose own estimate for Lennar's fourth quarter was $1.28 a share.

Responding to a deteriorating market, some large U.S. construction companies have pulled back on the number of homes they build to protect their gross margins. But Lennar has pursued a different course trading margin for volume.

Its policy has been to start a new home as soon as one is sold with or without first finding a buyer and using incentives to draw and keep customers. Executives said that more than 50 percent of the homes they start building have buyers.

"Rather than slamming on the brakes, they're trying to let the business wind itself down to whatever the appropriate level is over time," Vencil said. "They are clearly adding to the problem overall to the market in having too much inventory. That may work for Lennar. It's certainly allowing them to take share."

WIDESPREAD SLUMP

Lennar has joined several U.S. home builders, including Beazer Homes USA Inc. KB Home, Hovnanian Enterprises Inc. and Toll Brothers, that have either posted lower quarterly earnings or cut their forecasts. The larger publicly traded builders, which comprise about 23 percent to 25 percent of the new home market, are suffering along with the rest of the sector.

According to the U.S.Commerce Department, home starts fell 19.8 percent in August from a year earlier to their lowest level in more than three years.
In its third quarter, Lennar closed on the sale of 17 percent more homes at an average price of $316,000 each, up 3 percent, or about $10,000, from a year earlier, but down from the first and second quarters.

Home prices in the eastern region were up 10 percent to $340,00. The central region was flat at $205,000, and the western region was down 1 percent to $451,000 from $455,000. Revenue rose 20 percent, to $4.2 billion.

However, the numbers came at a cost as the company used more incentives to push sales, cutting gross margins to 18.7 percent, down 7.6 percentage points, more than the 6.1 percentage-point drop the company had expected. The western region was hardest hit, with gross margins falling 10.5 percentage points.

Unlike many other home builders, whose orders for new homes were off by as much as 49 percent, Lennar's were down only 5 percent. The cancellation rate from the third quarter, as well as prior periods, was about 30.5 percent, the company said.