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.
"We think the guidance may be difficult to achieve, as the high level of homes for sale will likely continue to pressure home prices, absent a sharp improvement in demand," Bank of America analyst Daniel Oppenheim wrote in a research note Wednesday morning. Even if Lennar reduces construction costs and corporate overhead, the high inventory of homes for sale will continues to pressure home prices, absent a sharp improvement in demand, which will lead to lower margins, Oppenheim noted. He maintained his 2007 earnings per share estimate of $1.90. For its part, Lennar said on its conference call that the 2007 comments represented a "goal" and weren't guidance per se. Lennar's optimistic target is reminiscent of when fellow homebuilder Hovnanian Enterprises ( HOV) said it would record
zero impairments in 2007 (after recording $336 million of charges in the fourth quarter) so long as the state of the housing market doesn't get any worse. For its latest quarter, Lennar recorded a loss of $196 million, or $1.24 a share, reversing the year-ago profit of $581 million, or $3.54 a share. Revenue for the December quarter slipped 15% from a year earlier to $4.27 billion. Analysts expected a loss of 81 cents a share and a top line of $4.15 billion. The latest quarter includes write-offs of option deposits and pre-acquisition costs of $111.1 million and valuation adjustments of $382.8 million. Lennar said it posted a latest-quarter homebuilding operating loss of $319.4 million, as new orders dropped 6% from a year ago. Lennar shares recently were up $2.27 to $51.99.