Home Builder Lennar Cuts Outlook
Despite 33% Quarterly Profit Rise

Miami home builder Lennar Corp. appeared to fare better than some of its competitors in the current housing slowdown as it posted 33% earnings growth and only a 3% decline in orders in its fiscal second quarter.

However, the company, like others in the home-building sector, reported softer market conditions and a pullback in demand. It trimmed its 2006 earnings outlook and warned that further reductions may be necessary as "market conditions are continually changing."

"The homebuilding industry has slowed, as evidenced by lower new orders and higher cancellations rates," President and Chief Executive Stuart Miller said in a statement. He blamed the pullback in demand to speculative buyers exiting the market and to changes in consumer sentiment toward buying homes.

The builder reported revenue of $4.58 billion, up 56% from $2.93 billion a year ago. Net income rose 33% to $324.7 million, or $2 a share, from $243.5 million, or $1.48 a share, a year earlier. Income from continued operations rose 39%. The results exceeded Thomson First Call's estimate of $1.86 a share.

But it was the company's orders that appeared to hold up better than many of its rivals in the quarter. Orders are a key metric that investors monitor as they reflect revenue the company will receive two or three quarters down the line when a home sale closes. The company's orders fell 3%. If joint ventures are excluded, orders were down 5%.

Indeed, many of Lennar's competitors have been reporting double-digit order declines of between 20% and 40% over the past few months. Pulte Homes Inc. and Toll Brothers Inc. have cut their profit forecasts after a weaker-than-expected spring sales season. Lennar's smaller 3% order decline was partly due to its decision to use more sales incentives.

The higher use of incentives took a toll on the company's gross profit margins from home sales, which contracted 1.4 percentage points to 23.5%.

Mr. Miller said that with a more challenging outlook for the second half of the year, it is focusing on "partially offsetting the effects of increased sales incentives by reducing land costs, production costs and selling, general and administrative expenses."

Majestic Research analyst John Tomlinson added that Lennar's year-to-year order comparisons weren't as tough as some of its competitors: Lennar's orders rose only 6% in its 2005 fiscal second quarter while many rivals experienced high double-digit order growth in the year-ago quarter. Mr. Tomlinson speculates Lennar may have a tougher time avoiding double-digit order decline in the second half of fiscal 2006 as year-over-year comparisons will be more difficult.

"Though the relatively small order decline was impressive, we believe Lennar is discounting more heavily than peers," UBS analyst Margaret Whelan said in a note. She speculates the heavy incentives will hurt future margins.

Lennar lowered its fiscal 2006 earnings estimate to a range of $8 to $8.25 from its previous estimate of $9.25 a share, but cautioned further cuts may still come.

"Management left the door open for further reductions in guidance, stating that it recognizes that market conditions are continually changing," Banc of America analyst Dan Oppenheim wrote in a note. "Given our sense that conditions continue to deteriorate, we expect guidance to be lowered further."

Mr. Oppenheim and Ms. Whelan don't hold shares in Lennar, but their firms have had an investment-banking relationship with the company in the past 12 months.

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