Lennar Report Adds to Homebuilders' Gloom

Shares in the sector fell Tuesday after the Miami-based builder announced a 73% profit drop and withdrew its 2007 earnings target

When Lennar (LEN) announced in January that its earnings this year could top those of 2006, the Miami homebuilder might have been having a bout of wishful thinking. On Mar. 27 Lennar withdrew that 2007 earnings goal, after its profits fell more than 73% in the three months ended February as potential customers continued shaking their heads. Not helping matters, investor worries have roiled the mortgage industry recently.

Lennar said its first quarter net earnings in 2007 were $68.6 million during the first quarter ended February 28, compared to $258.1 million in the same period of 2006. "While some markets are performing better than others, the typically stronger spring selling season has not yet materialized," CEO Stuart Miller said in a press release Mar. 27.

After the news, Lennar's stock fell 2.3% in midday NYSE trading Mar. 27. Shares of other homebuilders moved lower in sympathy: Centex (CTX) fell 1.7%, Hovnanian (HOV) was down 3.7%, KB Home (KBH) shed 2.7%, Toll Bros. (TOL) dipped 2.5%, and Beazer Homes (BZH) slipped 3.4%.

Miller had cheered investors in January with an announcement that his company would earn more this year than the $3.69 per share earned in 2006, but he had added the conditions that the healthy economy continues and the new home market shows its usual seasonal improvement. Now Lennar earned only 43 cents per share during the February quarter, including one time items, compared to $1.58 per share in 2006.

Meanwhile investors have panicked about the mortgage lending industry during recent weeks, as subprime specialists such as Accredited Home Lenders (LEND) and Fremont General (FMT) struggle with their finances and foreclosure rates rise. "Given the state of the market, we do not expect to achieve our previously stated 2007 earnings goal, and we are not comfortable providing a new earnings goal at this time," Miller said in the press release March 27.

The Lennar news is just the latest in a string of gloomy developments for the housing sector. According to a Mar. 26 report, new home sales fell 3.9% in February (see BusinessWeek.com, 3/26/07, "A Nasty Surprise on New Home Sales"). And the S&P Case/Shiller home price index for January, released Mar. 27, fell 0.6% to 202.3.

As home prices dropped, Lennar's revenues from sales decreased 10% in the February quarter to $2.6 billion from $2.9 billion in 2006. The company tried to pull in customers with higher sales incentives, but new home orders plummeted nonetheless by 27% year over year to 7,132 homes during the Feb. quarter.

Miller has been fighting back with steps like cutting back on inventory and assets. In one example, the homebuilder on Jan. 2 highlighted its plan with the real estate company LNR Property Corp. to sell a 62% stake in LandSource Communities Development LLC to MW Housing Partners. Lennar's February quarter earnings per share include items like a $175.9 million pretax gain in the deal involving LandSource, which is a venture that buys and develops property. Lennar says it could potentially pull in another $400 million in future years, in addition to profits from its continuing ownership interest in the new MW Housing venture. But so far the company's loss on land sales totaled $26.5 million in the first quarter of 2007, compared to a profit of $49.1 million last year.

Companies that range from homebuilders to banks to retailers have been feeling the ripple effects of the slowing housing market during recent months. In another example from this week, the home furnishing retailer Ethan Allen Interiors (ETH) said in a statement Mar. 26 that its March quarter earnings per share will range between 53 cents and 56 cents compared to 59 cents during the same period last year.