by Ian Harvey
June 18, 2020
Lennar Corporation’s shares rise after beating earnings estimates. This marks the fifth consecutive quarter of an earnings beat. Time to buy?
And, Stock Options Made Easy “Earnings Predictions” Members were well-positioned to benefit; and made 219% potential profit based on a CALL OPTIONS trade.
The homebuilder reported stronger-than-expected earnings and in-line revenue late Monday, with the stock rising Tuesday, defying unprecedented health crisis and significant business disruption over the past three months.
Wall Street had expected Lennar earnings per share to slip 1% to $1.29 with revenue falling 5% to $5.29 billion.
But Lennar earnings per share rose 27% to $1.65 with revenue falling in line with estimates.
Lennar executive chairman Stuart Miller said business rebounded "significantly," and that total new orders declined by 10% by the end of the quarter. Deliveries ended flat year-over-year.
"While unemployment increased throughout the quarter due to impacts from the Covid-19 pandemic, customers moved from rental apartments and from densely populated areas to purchase homes, and home sales grew steadily, as record-low interest rates and low inventory levels drove a favorable rebound in the homebuilding industry," he said in a news release.
“Earnings Predictions” Members executed a call options trade on Lennar Corporation on Monday, June 15, 2020, at a cost of $1.80; and the sell value of the option hit $5.75 – a potential profit of 219%.
The recommended options trade for “Armchair Trader Series” Members.....
** OPTION TRADE: Buy the LEN JUN 19 2020 60.000 CALL at approximately $2.40.
The Recommended Trade…..
“U.S. homebuilder, Lennar Corporation (NYSE:LEN) will report earnings before the market opens on Tuesday, June 16, 2020. The consensus earnings estimate is $1.29 per share on revenue of $5.73 billion.
Consensus estimates are for earnings to decline year-over-year by 0.77% with revenue increasing by 3.00%.
For the last reported quarter, it was expected that Lennar would post earnings of $0.83 per share when it actually produced earnings of $1.27, delivering a surprise of +53.01%.
Over the last four quarters, the company has beaten consensus EPS estimates four times.
LEN stock actually has rallied of late. And even with an 8.4% decline on Thursday is in the green year-to-date. Investors seem to be betting that the pandemic will lead to an exodus out of urban areas — and potentially into developments built by the likes of Lennar.
Short interest has decreased by 0.4% since the company's last earnings release.
Lower mortgage rates and demand for affordable housing from multiple demographic groups are likely to have given a boost to its order growth. The company has been shifting the business mix to lower-priced homes. This is expected to have boosted its sales absorption pace to some extent.
Commentary about a rebound and improvement in
demand in the latter half of April and through May signals improved order
Lennar has been focused on continuous improvement in the SG&A (selling, general and administrative) line owing to operating leverage and investments in technology.
Lennar had its target price hoisted by research analysts at Wells Fargo & Co from $36.00 to $67.00 in a research report issued last Friday. The brokerage currently has an "overweight" rating on the construction company's stock. Wells Fargo & Co's price objective suggests a potential upside of 17.09% from the company's previous close.”
Why The Positive Earnings……
The results mainly benefited from effective cost control and focus on making Lennar’s homebuilding platform more efficient, which in turn resulted in higher operating leverage.
The Miami company pointed to homebuyers moving to less densely populated areas as one of the drivers of the better-than-expected numbers.
Lennar rebounded from the initial covid-19 crash in an extremely orderly uptrending channel, bouncing higher on each successive test of trendline support.
Coupled with uptrending support to the downside, Lennar is forming an ascending triangle pattern that triggers a buy signal on a material push through $65.
This means that a breakout above that relative high-water mark definitively puts buyers back in control of the price action.
Also, relative strength has been in an uptrend of its own since Lennar’s price action bottomed. That indicates that this stock has been leading the rest of the market higher during the broad-based rally in stocks.
For the fiscal third quarter, Lennar expects deliveries in the range of 13,200-13,400 homes; ASP within $38,000-$385,000; homebuilding gross margin in the 21.5%-21.75% band; and homebuilding SG&A of 8.3-8.5%. New orders are expected within 12,800-13,000.
For the fiscal fourth quarter, Lennar expects deliveries in the range of 14,300-14,600 homes; ASP of $38,000; homebuilding gross margin in the range of 21.75-22%; and homebuilding SG&A of 8%. New orders are expected within 12,000-12,250.
Lennar reinstituted guidance for fiscal year 2020. It now expects deliveries to be in the range of 50,500 to 51,000 homes with a gross margin on home sales of roughly 21.5% and a net margin on home sales of about 13%.
"While many parts of the economy are still waiting to open and rebound, the housing market has proven to be resilient in the current environment," Miller said. "We expect this trend to continue and for housing to be a significant driver of employment and rebound for the broader economy."
J.P. Morgan analyst Michael Rehaut reiterated the neutral rating he's had on the stock since March 18, and kept his price target at $64. He said he believes Lennar's guidance for third-quarter orders to decline 3% to 4% from a year ago, and fourth-quarter orders to fall 6% to 8%, "falls somewhat short of investor expectations for order growth to have recently turned modestly positive." Rehaut said, however, that despite the stock's reaction, he said the outlook is "relatively encouraging," as it comes after "challenging" comparisons of 9% growth in last year's third quarter and 26% growth in last year's fourth quarter.
The positive reinforcement that the shares are seeing post-earnings cements Lennar’s inclusion in an elite group of stocks in 2020: It’s up on the year.
Lennar looks primed for a breakout through $65. From there, the shares shouldn’t face much resistance at all-time highs just above $72.
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An Important Note: That any suggestions for options trade considerations require investors/traders to use their own discretion as to when to enter or exit! As well, it is advisable to do further research and due diligence before executing your trade.
It is sometimes best to exit a trade, if there is already sufficient profit accrued, before an earnings report is presented. GREED can be the undoing of a nice profit!