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Lennar to Houston: We have a problem

Stock MarketsJan 15, 2015 01:38PM ET
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© Reuters. Lennar model homes are seen at a development in Arvada

By Ankit Ajmera

(Reuters) - Lennar Corp (N:LEN), the second-largest U.S. homebuilder by the number of homes sold, said it expects 2015 margins to be squeezed as falling oil prices hurt demand in Houston, a city heavily dependent on the energy sector.

The warning overshadowed a 50 percent jump in quarterly profit and pushed Lennar's shares down as much as 9 percent.

Shares of rivals D.R. Horton Inc (N:DHI) and PulteGroup Inc (N:PHM) were also hit.

Houston accounted for about 12 percent of Lennar's homebuilding revenue in 2013.

"We're well positioned (in Houston) but we're smart enough to know that as oil moves down, there may be some job loss, primarily more on the higher end, and it could impact pricing," a company executive said on a conference call.

The first oil industry layoffs have already been announced in Houston, with realtors there predicting a decline of up to 12 percent in home sales this year.

Lennar said it expected 2015 gross margin of 24 percent, down from 25.4 percent in 2014.

Florida-based Lennar is not the only one to warn on margins for the current year. Smaller rival KB Home (N:KBH) said it expects higher labor and land costs and sale incentives to hit margins in 2015.

"Lennar as well as the overall industry's pricing power has peaked. We expect flat to somewhat down pricing going forward. This is going to lead to lower margins probably for the next couple of years," Jim Krapfel, an analyst with research firm Morningstar, said.

Lennar has so far been able to raise prices despite a choppy recovery in the U.S. housing market as it mainly caters to buyers looking to upgrade to a bigger home. Such buyers are generally not affected much by volatile interest rates.

The company's gross margin fell for the first time in three years in the fourth quarter ended Nov. 30.

Chief Executive Stuart Miller said he remained optimistic about the housing recovery, citing falling gasoline prices, low interest rates and the Federal Housing Administration's decision to cut premiums.

Lennar earned $1.07 per share in the fourth quarter, trumping the average analyst estimate of 96 cents per share, according to Thomson Reuters I/B/E/S.

Lennar's shares were down 6.3 percent at $42.88 on the New York Stock Exchange.

Up to Wednesday's close, the company's stock had risen about 20 percent in the past 12 months, compared with a 12 percent rise in the Dow Jones Home Construction Index (DJUSHB).

Lennar to Houston: We have a problem

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