Lennar Dons Rose-Colored Glasses

Lennar(LEN) shares climbed 5% Wednesday after the homebuilder gave a seemingly upbeat forecast for 2007.

That projection, however, should be taken with a grain of salt.

The company reported a fourth-quarter loss, as expected, and said that its 2007 earnings could meet or exceed the 2006 profit of $3.69 a share. That would be well above analysts' consensus estimate for earnings of $2.61, according to Thomson First Call.

But Lennar's target is based on a long string of conditions that must be met. It requires that strong employment continues, low interest rates stay low, the economy stays healthy and the market for new homes demonstrates traditional seasonal improvement.

The most striking part about the forecast is that it suggets that margins will improve in the second half of 2007.

Lennar has been aggressively cutting prices to clear homes and restore its balance sheet. Nowhere in the earnings release does the company say it has reversed this policy because the housing market is improving.

As a result, gross margins on Lennar's home sales (excluding inventory valuation adjustments) were 14.4% in the fourth quarter, compared with 27% a year earlier.

The homes already in backlog (to be booked as revenue in the first half of the year) also have low margins due to the price cuts.