On Mar 12, we maintained a Neutral recommendation on PulteGroup Inc. (PHM - Analyst Report), following appraisal of its fourth quarter results.
Why the Neutral Recommendation?
On Jan 31, 2012, this leading national homebuilder announced fourth quarter 2012 earnings of $0.34 per share, which beat the Zacks Consensus Estimate by 9.7% and were significantly better than the prior-year quarter results. Improving housing fundamentals combined with gross margin expansion and solid overhead leverage led to the earnings beat. Pulte’s total revenue increased 24.6% year over year, owing to 23.4% revenue growth in the homebuilding segment. Total revenue also beat the Zacks Consensus Estimate of $1.46 billion.
The growth in Pulte’s homebuilding revenues was driven by an increase in new home orders and average selling prices as the housing fundamentals improve steadily. In 2012, Pulte returned to profitability as an enhanced housing market and the company’s restructuring initiatives resulted in year-over-year improvement in net new orders, closings, revenues as well as gross margins.
The Zacks Consensus Estimates for both 2013 and 2014 have seen a mixed movement with estimates moving in both directions.
We believe that homebuilders like Pulte, which enjoy significant land positions, broad geographic and product diversity, and better capital positions, are expected take maximum advantage of the housing recovery. Management believes that 2013 will be a better year for the housing industry than 2012. We believe that Pulte’s cost reduction and operating efficiency improvement plans combined with further improvement in housing demand will boost profitability in 2013.
However, the new home demand remains at historically low levels due to the current weak U.S. economic conditions and tight mortgage lending standards. Sustainable increases in housing and housing demand for the long term will require the overall economy to strengthen, including further job growth. Additionally, the pending federal budget decisions could potentially disrupt the housing recovery. Moreover, the housing recovery was uneven and not broad based with some markets showing more upward momentum than others. A sustainable housing recovery in the long term can be achieved only through a broad-based improvement in the overall economy, which we believe will take time.
Other Stocks to Consider
Pulte carries a Zacks Rank #3 (Hold). Some other housing stocks worth considering include NVR Inc. (NVR - Snapshot Report) – Zacks Rank #1 (Strong Buy), D.R. Horton Inc. (DHI - Analyst Report) -Zacks Rank #2 (Buy), and Consorcio ARA, S. A. B. de C. V. - Zacks Rank #2 (Buy).