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Balanced View on PulteGroup

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On Jun 5, 2014, we issued an updated research report on PulteGroup Inc. (PHM - Free Report) .

On Apr 24, the national homebuilder reported weak first-quarter 2014 results, missing the Zacks Consensus Estimate for both earnings and revenues.

Pulte’s first-quarter earnings of 19 cents per share lagged the Zacks Consensus Estimate as well as the year-ago figure of 21 cents per share by 9.5%, owing to weak top line, higher SG&A ratio and higher-than-expected tax rate. Revenues also lagged the Zacks Consensus Estimate. Pulte’s Homebuilding revenues declined 3.5% due to order shortfall and lower number of homes delivered. Though improving sequentially this quarter, Pulte’s order trends have remained weak for several quarters versus competitors due to lower community count.

Pulte intentionally slowed down sales pace across some of its communities (in turn lowering 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.

This strategy, coupled with better inventory management, has consistently improved Pulte’s margins, which in turn increased its cash flows in the last two years.

Moreover, pricing has been going up due to a change in mix toward steeply-priced/higher margin move-up and active-adult homes and the company’s strategic pricing initiatives.

However, 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. Also, rising building materials and labor costs are an increasing margin headwind.

Key Picks from the Sector

Pulte currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the construction sector include Gafisa S.A. and TRI Pointe Homes, Inc. (TPH - Free Report) carrying a Zacks Rank #2 (Buy). In the broader building products/ materials sector, Gibraltar Industries, Inc. (ROCK - Free Report) , sporting a Zacks Rank #1 (Strong Buy) is worth mentioning.

In-Depth Zacks Research for the Tickers Above

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