PulteGroup Beats EPS Est, Lags Rev

PulteGroup Inc.’s (PHM - Analyst Report) third quarter adjusted earnings (excluding tax benefit) of 27 cents per share beat the Zacks Consensus Estimate of 20 cents by 35% and were significantly better than adjusted earnings of 11 cents in the prior-year quarter.

The company conducts its operations through two primary business segments – Homebuilding and Financial Services. PulteGroup reported total revenue of $1.30 billion in the third quarter, up 14% from the prior-year quarter attributable to solid homebuilding revenues. Total revenues, however, missed the Zacks Consensus Estimate of $1.40 billion.

A recovering homebuilding market combined with PulteGroup’s cost reduction and operating efficiency improvement initiatives led to bottom-line beat in the quarter.

Quarter in Detail

Pulte’s homebuilding revenues, derived from popular brands like Pulte Homes, Centex and Del Webb, rose 13.5% to $1.26 billion, driven by an increase in number of homes closed and average selling prices. Home sales increased 11.8% to $1.23 billion while land sales shot up 78% to $22.6 million in the quarter. Revenues in the company’s Financial Services scaled up 70.0% to $47.3 million.

Home closings were up 5% year over year to 4,418 homes in the reported quarter owing to increase in sales in most segments excluding Northeast, Florida and Texas. The average sales price of homes delivered stood at $279,000, up 5% year over year attributable to a change in mix towards steeply priced move-up homes, introduction of new communities and improving housing market conditions.

New home orders were up 27% year over year to 4,544 homes in the quarter, attributable to rising home demand in all the regions. Most of the segments reported growth in new orders in the quarter, although there was a 7% decline in the number of communities. The value of new orders grew 43% year over year to $1.3 billion in the quarter.

The boom in net order book was attributed to a stabilizing recovery in the housing market. This was backed by low home prices and moderating interest rates as renting became a more expensive option luring buyers to new homes.

Quarter-end sales order backlog rose 49% to 7,686 homes as of September 30, 2012 from 5,143 homes as of September 30, 2011. The value of the backlog rose 60.7% to $2.25 billion as of September 30, 2012 from $1.40 billion as of September 30, 2011. The backlog rose owing to significant net sales order increase.

Adjusted gross margins expanded 320 basis points over the prior-year quarter and 130 basis points sequentially to 21.6%. It was driven by pricing benefits, operating efficiency improvement initiatives and a better mix of sales, particularly of move-up homes.

On October 24, 2012, the company announced a tender offer of outstanding senior notes worth $1 billion.

Outlook

The company is seeing a definite improvement in demand in the homebuilding sector and believes its cost reduction and operating efficiency improvement plans will lead to profitability in 2012.

We are encouraged by Pulte’s solid third quarter results and bullish growth projection for the upcoming quarters, backed by the gradually recovering homebuilding market. We believe that homebuilders like Pulte and Lennar Corporation (LEN - Analyst Report), who have significant land positions, broad geographic and product diversity, and better capital positions, are expected to benefit the most as market conditions recover. However, the housing recovery is uneven and not yet broad based. We would thus prefer to remain on the sidelines until we witness a substantial recovery in the overall housing market.

We currently have a Neutral recommendation on PulteGroup Inc. The stock carries a Zacks #3 Rank (a short-term Hold rating).