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Homebuilder PulteGroup, Inc. (PHM - Analyst Report) posted third quarter 2013 adjusted earnings of 45 cents per share, which surpassed the Zacks Consensus Estimate of 34 cents by 32.3%. Earnings were also significantly better than the prior-year quarter earnings of 30 cents per share on the back of a double-digit increase in top line and margin expansion.

PulteGroup reported total revenue of $1.58 billion in the quarter, up 21.4% year over year, owing to double-digit revenue growth in the homebuilding segment. Total revenue beat the Zacks Consensus Estimate of $1.45 billion by 9%. However, net orders once again declined in the quarter.

Quarter in Detail

The company conducts its operations through two primary business segments – Homebuilding and Financial Services. Pulte’s Homebuilding revenues rose 23.3% to $1.55 billion, driven by higher average selling prices which made up for the order shortfall.

Home sales increased 21% to $1.49 billion as the company witnessed improved demand in almost every market. Land sales rose 146.6% to $55.8 million in the quarter.

New home orders were down 16.8% year over year to 3,781 homes in the quarter due to 15% decline in the number of communities. In fact, all the regions witnessed decline in net new order units. The value of new orders declined 7.7% year over year to $1.21 billion in the quarter.

The company’s net orders decline, we believe, is due to moderating sales pace. Like PulteGroup, another homebuilder KB Home (KBH - Analyst Report) also reported decline in net sales order in its recently reported quarter. Lennar Corp (LEN - Analyst Report) and Meritage Homes Corp (MTH - Snapshot Report) also delivered softer net order growth.

We believe that PulteGroup has been intentionally slowing down sales in some markets due to lack of land development and scarcity of finished lots. The company is focusing more on driving price and margin rather than pushing up unit volumes, which, we believe, has been affecting net order growth. Though pricing increased sharply in the quarter, the net order decline raises concern.

Home closings were up 9% year over year to 4,817 homes in the reported quarter. The average selling price of homes delivered stood at $310,000, up 11% year over year, attributable to a change in mix toward steeply-priced Pulte-brand move-up homes and active adult homes, which typically carry higher selling prices.

The company’s backlog value increased 8% over the prior year to $2.4 billion, representing 7,522 homes in the quarter.

Adjusted homebuilding gross margins expanded 390 basis points (bps) from the prior-year quarter and 160 bps sequentially to 25.5% of home sales. It was driven by improved pricing and better mix of sales (particularly of move-up homes).

Financial Services

Revenues from the company’s Financial Services segment declined 27.4% to $34.3 million.  The segment recorded a pretax income of $11 million in the quarter, down 59.3% year over year. Weak revenue from the segment was due to unfavorable housing market conditions and increased competition resulting from the rapid rise in interest rates, partially offset by higher loan originations.

During the quarter, Pulte repurchased 5.3 million of its common shares at a cost of $83 million. The company also repurchased $27 million of outstanding senior notes.

Our Take

Pulte is optimistic about the growing momentum in the housing market and believes housing demand will continue to grow despite increase in interest rates and price appreciation. However, the housing industry is witnessing weakness in home purchases due to higher home prices, a rapid rise in mortgage rates, and economic uncertainty. Pulte currently carries a Zacks Rank #5 (Strong Sell).

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