On Mar 5, 2014, we issued an updated research report on PulteGroup Inc. (PHM - Analyst Report).
On Jan 30, the national homebuilder reported better-than-expected fourth-quarter results beating the Zacks Consensus Estimate for both earnings and revenues.
Pulte’s fourth-quarter earnings of 57 cents per share surpassed the Zacks Consensus Estimate by 21.3% and grew 66% year over year driven by outstanding margin growth and strong pricing power. Revenues beat the Zacks Consensus Estimate and increased 5.7% year over year as higher pricing made up for order shortfall.
We commend Pulte’s strong cash position and consistently solid margins. The company’s cash flows have improved significantly in the last two years due to increased profits and better inventory management. Pricing has been going up due to a change in mix toward steeply-priced/higher margin move-up and active-adult homes and improving housing market conditions resulting in better pricing.
However, Pulte’s net orders were weak in 2013 due to rising interest rates, increasing home prices and a lower community count. Pulte has intentionally slowed down sales pace across some of its communities (in turn lowering its community count) due to lack of land development and scarcity of finished lots. Housing inventory, both existing and new homes, remain tight in most markets. Instead, the company is focusing more on driving price and margin in most communities. Though Pulte’s pricing and profits are improving, the below-average order growth raises concern.
Moreover, increasing mortgage rates and lack of overall economic recovery could hurt demand for new homes. Though management expects better volumes in the spring selling season, we prefer to remain on the sidelines until the actual results are out.
Key Picks from the Sector
Other stocks worth considering in the homebuilding sector include Taylor Morrison Home Corporation (TMHC - Snapshot Report), MRV Engenharia e Participa and William Lyon Homes (WLH). All the three companies enjoy a Zacks Rank #1 (Strong Buy).