Lennar Adjusts

Updated from 8:23 a.m. EDT

Lennar(LEN) reported strong growth in second-quarter earnings Monday but lowered its guidance for full-year 2006 results, as growing inventory levels across the U.S. housing market continue to hurt new sales.

The homebuilder earned $324.7 million, or $2 a share, in the quarter, up 33% from $243.5 million, or $1.48 a share, a year ago. Sales rose 56% to $4.58 billion. On average, analysts surveyed by Thomson First Call were forecasting earnings of $1.85 a share in the most recent quarter.

For full-year 2006, Lennar expects to earn $8.00 to $8.25 a share, down from the estimate of $9.25 a share it gave in its first-quarter earnings release. Wall Street was already in the company's ballpark, forecasting earnings of $8.15 a share for the current fiscal year, which ends in November.

In the second quarter, Lennar said, new-home deliveries totaled 12,506, up from 8,951 a year ago, while the average sales price rose by $29,000 to $322,000. New-home orders fell 3% to 11,757 from 12,095 a year ago, bringing the May 31 backlog to $6.5 billion, from $7.1 billion on Feb. 28.

The order numbers, which were better than many other builders, were helped by the company's willingness to use price incentives to move inventory.

"After a long period of steady growth, the homebuilding industry has slowed, as evidenced by lower new orders and higher cancellation rates in many geographic markets across the country," Lennar said.

"These conditions are primarily the result of speculators exiting the market and changing homebuyer sentiment. Although current market conditions have softened, we believe favorable demographic trends and high employment levels bode well for long-term homebuilding fundamentals.

"Even while market conditions have been changing, we have maintained a focused and orderly approach to managing our operations with an intensified emphasis on maintaining strong cash flow generation and achieving evenflow production," Lennar said.

The goal of evenflow production is to start and close the same number of homes in a year, in an assembly-line fashion.

If other builders start turning to such measures, there could be a temporary spike in inventory and downward pressure on pricing, as more incentives are used to move housing inventories, says Susquehanna Financial analyst Stephen East. But the appearance of deals may lure consumers back into the market, and the overall inventory levels might then be worked through more quickly, rather than there being a slow bleed, East says.

He expects Centex(CTX), D.R. Horton(DHI) and possibly Pulte Homes(PHM) to start talking about evenflow in their upcoming earnings calls.

One concern with evenflow production is that it may lead to higher spec construction, which would put further pressure on home prices and incentives, wrote Bank of America analyst Daniel Oppenheim in a research note.

On its conference call, Lennar acknowledged the growing inventory levels across the U.S. housing market, saying many purchasers are waiting for better prices, while speculator demand -- which helped fuel the recent housing boom -- has almost entirely disappeared. However, the company declined to give any estimate as to how long it will take for inventory levels to be worked down.

"The reality is that any projection at this point would only be a guess," Lennar CEO Stuart Miller told investors on the call.

Lennar rose 2.5% to $45.66 in afternoon trading Monday, partially helped by a new-home sales report from the government that showed sales across the country were higher than expected in May, though still down 5.9% from a year earlier.

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