updated 9/26/2006 11:13:21 AM ET 2006-09-26T15:13:21

Lennar Corp., one of the nation’s top homebuilders, said Tuesday its third-quarter profit dropped 39 percent due to a continued slowdown in the housing market. Lennar also lowered guidance for the fourth quarter as it limits its land purchases and works to lower inventory.

The Miami-based company’s net income fell to $206.7 million, or $1.30 per share, from $337.3 million, or $2.06 per share, in the year-ago period.

Still, quarterly revenue climbed 20 percent to $4.18 billion from $3.5 billion, as home deliveries rose in every region, and the average sale price of homes delivered also increased. And, new home orders were down only 5 percent from the third quarter a year ago, a relatively modest drop considering the slowdown in the market.

Analysts polled by Thomson Financial were looking for third-quarter earnings of $1.28 per share on sales of $3.72 billion. Third-quarter results were within the company’s previously announced revised goal of $1.25 to $1.35 per share.

Shares in morning trading on the New York Stock Exchange. They are still down 13.5 percent since the end of 2005.

The company reported a 39 percent decrease in earnings from continuing operations and a 31 percent rise in costs of homes sold, land sold and general and administrative expenses compared to last year.

Buyer incentives and upgrades to new homes are included in these costs, but it’s the fall in demand that really hurt profits, said home building analyst Todd Vencil of BB&T Capital Markets.

The new homes market has seen its share of problems this year. Housing construction plunged in August, falling to the lowest level in more than three years, the Commerce Department reported Sept.  19. Construction of new homes and apartments fell by 6 percent, and the annual rate for construction was down to 1.665 million units, the slowest pace since April 2003.

“The U.S. housing market has continued to deteriorate, trailing down further and faster than anticipated,” Lennar President and Chief Executive Stuart Miller said in a statement. “We have limited our land purchases and reduced standing inventory through strategic asset management. Additionally, we have emphasized salesmanship and simplicity in the field which help control costs in the management of our business.”

Gross margins on home sales totaled $729.2 million, or 18.7 percent, down sharply from $846.4 million, or 26.3 percent, last year. The company cited decreases in all of its homebuilding segments, primarily due to higher sales incentives offered to homebuyers and $32 million of inventory valuation adjustments.

Vencil noted that Lennar was continuing to build new homes, using a strategy where it keeps home starts on par with the amount of homes delivered.

“They start a new home when another new home is delivered,” Vencil said. “By keying your home starts off deliveries you’re going to, over time, gravitate your building to where the natural course of the market is, without disrupting it.”

Vencil also said it appeared the company was trading profit for volume for the time being.

Lennar also cut fourth-quarter earnings guidance to a broad range of $1 to $1.30 per share due to current market conditions. Analysts currently forecast much higher fourth-quarter earnings of $1.60 per share.

“It tells you that the market is worse than they thought it was going to be,” Vencil said.

Two other large homebuilders, Beazer Homes USA Inc. and KB Home, cut their full-year financial forecasts this month.

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