Ahead of the open on Thursday, homebuilder Lennar Corporation (NYSE:LEN) rolls into the earnings limelight to release its first-quarter earnings report. The company is currently sitting on a strong fundamental foundation, having bested Wall Street’s targets for the past 12 quarters.
LEN is currently riding a steady growth trend in the housing market, but rising costs and an end to quantitative easing by the Federal Reserve could make guidance unpalatable.
Digging into the current quarter’s numbers, Wall Street is expecting LEN to post earnings of 45 cents per share, up about 28.6% over the same quarter last year. Revenue, meanwhile, is seen rising 10.3% to $1.5 billion in the first quarter.
That said, expectations have fallen by about 3 cents per share during the past 90 days, likely due to the harsh winter weather that gridlocked much of the Midwest and Northeast.
Despite the winter weather, there are whispers on Wall Street that LEN could surprise to the upside once again. Specifically, data from EarningsWhisper.com reveals that Lennar’s first-quarter whisper number arrives at 52 cents per share — 15.5% above the consensus, but just below Lennar’s average upside surprise of 17.8% during the past four quarters.
While the whisper number may hint at high expectations, Wall Street’s long-term outlook is conservable more tempered. According to data from Thomson/First Call, the brokerage community has doled out 10 “buy” ratings, compared to 14 “holds,” and no “sell” ratings.
Furthermore, LEN’s consensus 12-month price target of $47.50 represents a discount to Monday’s close at $49.31. As such, there is room for potential upgrades and/or price-target increases if Lennar’s guidance is to the high side of expectations.
Short interest also presents an opportunity for a potential surprise move in LEN stock. As of the most recent reporting period, some 29.5 million shares of LEN stock were sold short. Representing a healthy 16.4% of the stock’s total float, this collection of shorted shares could fuel a short-covering rally under the right conditions.
Options activity also suggests a negative outlook among short-term speculative investors ahead of Lennar’s quarterly report. For instance, LEN’s put/call open interest ratio for March/April rests at 0.51. While this ratio indicates that calls roughly double puts among near-term options, it has risen sharply since its late-February reading of 0.16.
Put volume spiked to 6,967 contracts on Monday — a 345% increase over LEN’s average daily put volume of 1,586 contracts. Additionally, while the March open interest leans heavily toward calls, this open interest is dominated by open interest of 33,228 call contracts at the in-the-money $45 strike.
Click to Enlarge Overall, March implieds are pricing in a potential post-earnings move of roughly 6% for LEN stock. This places the upper bound at $51.95, marking a potential breakout above round-number resistance at $50, while the lower bound lies at $46.05, indicating the potential for a breach of support at LEN’s 50-day moving average.
2 Trades for LEN Stock
Call Spread: With LEN trading in a low-expectations environment despite a strengthening housing market and growing U.S. economy, the share have plenty of potential for upside following this week’s quarterly report. Traders looking to take a chance on a LEN rally might want to consider the Apr $49/$55 bull call spread.
At last check, this spread was offered at $1.98, or $198 per pair of contracts. Breakeven lies at $50.98, while a maximum profit of $4.02, or $402 per pair of contracts, is possible if LEN closes at or above $55 when April options expire.
Put Spread: For those traders looking to jump on the bearish bandwagon, a Mar $46/$49 bear put spread also has plenty of potential. At the close on Monday, this spread was offered at 88 cents, or $88 per pair of contracts. Breakeven lies at $48.12, while a maximum profit of $2.12, or $212 per pair of contracts, is possible if LEN closes at or below $46 when March options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
