PulteGroup, Inc. (PHM Quick QuotePHM - Free Report) has been riding on land acquisition strategies and focusing on entry-level buyers. Also, business expansion via community openings in various locations bodes well. Additionally, the company raised shareholders’ value with regular repurchases and dividend distribution.

Shares of this leading homebuilder gained 21.1% in the past three months compared with the Zacks Building Products - Home Builders industry’s 14.1% growth. The upside can be attributed to a strong fourth-quarter 2022, where earnings and revenues surpassed their respective Zacks Consensus Estimates and increased year over year in double digits.

Home sales gross margin was up 200 basis points (bps) and adjusted operating margin increased by 250 bps year over year. The improvement in the past few quarters helped PulteGroup lower its debt-to-capital ratio to 18.7% and deliver a full year return on equity of 32.9%.

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However, high inflation, supply chain woes and project delays are denting housing orders and backlog. Although demand has started improving as companies introduced various discounts and reduced prices to overcome the affordability issue, orders and backlog remain a major concern.

Let’s delve deeper into the factors influencing this Zacks Rank #3 (Hold) company. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Growth Driving Factors

Land Acquisition Strategy: PulteGroup’s land acquisition strategies aim at improving volumes, revenues and profitability on an annual basis. In 2022 and 2021, the company spent $4.5 billion and $4.2 billion on land acquisition and development, respectively. PulteGroup’s land strategy also emphasizes investing in shorter-lived, smaller land assets while expanding the use of land option agreements, when possible, thereby mitigating market risk.

PHM currently expects land spending to drop materially in 2023, thanks to the change in buyer demand. The company expects the land acquisition and development spend in 2023 to drop to approximately $3.3 billion. Of these, it estimates 65% will go toward the development of owned land positions. The company expects to realize higher returns on invested capital given plans to moderate the rate of land spend, increase the use of land options where possible and accelerate inventory turns.

First-Time/Entry-Level Buyers: PulteGroup remains focused on growing demand for entry-level homes, which aim at lower-priced homes, given affordability concerns prevailing in the U.S. housing market. The company has been reaping benefits from the successful execution of strategic initiatives to boost profitability. In view of these strategic efforts, the growing share of first-time buyers is encouraging. First-time buyers represented 36% of closings for the fourth quarter of 2022, along with 39% move-up buyers and 25% active adults. In fourth-quarter 2021, it comprised 33% first-timers, 42% move-ups and 25% active adults. The shift from mix to first-time is in line with its strategy of having more than one-third of business in the first-time buyer space.
 
Rapid Community Openings: The company recently announced community openings in various locations. On Mar 16, it unveiled a new community in Louisville, The Trails at Belmond. On Mar 8, it introduced expansion in the Greenville market with three new construction communities within its Pulte Homes brand. The first community, Indigo Park, is in Easley and is likely to open this summer. The second community — Briarwood Reserve in Spartanburg — is set to open in late 2023. The last one, Alston Park in Greenville, is expected to open in early 2024.

Driving Shareholder Value: PHM has been paying quarterly dividends for nearly four decades. It has been consistently focusing on sharing its cash flows with shareholders and maintaining a strong financial position. In December 2022, it announced a quarterly dividend hike of 7% to 16 cents per share. This is payable Jan 3, 2023, to shareholders of record at the close of business on Dec 14, 2022.

In 2022, PHM paid quarterly cash dividends of $143.1 million and $148.1 million in 2021. Also, it repurchased 24.2 million and 17.7 million shares in 2022 and 2021 for $1.1 billion and $897.3 million, respectively. On Jan 31, 2022, its Board of Directors increased the share repurchase authorization by $1 billion. At the end of 2022, the company had $382.9 million remaining in authorization.

Causes of Concern

Tepid Orders & Backlog Numbers: Net new orders in the fourth quarter of 2022 declined 41% from a year ago to 3,964 homes. The decrease in orders reflects several headwinds, like rising mortgage rates, lower affordability, lower consumer confidence and slowed demand. Also, net new orders in the quarter were impacted by a significant increase in cancellations. The cancellation rate for the fourth quarter was 32%, much higher than the 11% in the year-ago period and 24% in the third quarter of 2022.

Grim Outlook: Given the slowdown in overall housing activity, PulteGroup expects home deliveries to be within 5,400-5,700 homes in first-quarter 2023, indicating a decline from 6,039 homes delivered a year ago. It expects the ASP to be within $565,000-$575,000, indicating an increase of 12% from a year ago. PHM expects homebuilding gross margins to contract 200 bps to 27% for first-quarter 2023 from the year-ago period. The company anticipates SG&A (as a percentage of home sales revenues) to be in the range of 10.5-11% versus 10.7% in the prior year. Tax rate in the first quarter of 2023 is likely to be 25%.

PHM assumed its current cycle time of 6-plus months will remain the headwind for the next several months. With 18,000 homes currently in production, it expects to close approximately 25,000 homes in 2023, down from 29,111 units reported in 2022. Also, it plans to dramatically lower its land spend in 2023. It expects total land investment to be approximately $3.3 billion, including 65% of the investment in the development of owned land positions.

Higher Inflation: Higher land and labor costs are threatening margins, as they limit homebuilders’ pricing power. Labor shortages are leading to higher wages while land prices are inflating due to limited availability. Also, the shortage of input materials is raising commodity costs, thereby impacting the company’s results. Raw material inflation is eating into homebuilders’ margins.

Although it has been navigating the challenges associated with supply shortages and land development well, these headwinds pose serious threats to the company’s margins. During fourth-quarter 2022 earnings call, the company pointed out that other than lumber, it has been an inflationary market in almost every aspect and that this was pressurizing margins.

Key Picks

Some better-ranked stocks in the same space are NVR, Inc. (NVR Quick QuoteNVR - Free Report) , Taylor Morrison Home Corporation (TMHC Quick QuoteTMHC - Free Report) and Toll Brothers, Inc. (TOL Quick QuoteTOL - Free Report) .

NVR: This Reston, VA-based homebuilder is engaged in the construction and sale of single-family detached homes, townhomes and condominium buildings, all of which are primarily constructed on a pre-sold basis. To serve homebuilding customers, NVR operates a mortgage banking and title services business. A disciplined business model and focus on maximizing liquidity and minimizing risks have helped NVR. The lot acquisition strategy helps the company avoid financial requirements and risks associated with direct land ownership and land development. This strategy allows it to gain efficiencies and a competitive edge over its peers.

NVR currently sports a Zacks Rank #1. NVR has seen an upward estimate revision for 2023 earnings over the past 30 days to $394.77 per share from $357.51 per share.

Taylor Morrison: This Scottsdale, AZ-based homebuilder’s ongoing operational enhancements, acquisition synergies and robust pricing power have more than offset the inflationary pressure and delays in some closings. The company’s well-balanced, diverse mix of portfolio and operating strategy is encouraging. TMHC has expanded its market footprint and product positioning in recent years through acquisitions and impressive organic growth, thereby serving a broad range of consumers in the entry-level, first-and-second move-up and resort lifestyle segments across the country. The success of these efforts has been driving growth for the company and enhancing its liquidity level, enabling it to take advantage of investment opportunities as the market evolves.

TMHC currently holds a Zacks Rank #1. The Zacks Consensus Estimate for its 2023 earnings has been upwardly revised to $6.46 per share from $5.47 per share over the past 30 days.

Toll Brothers: Based in Horsham, PA, Toll Brothers is a leading builder of luxury homes. The company has been benefiting from its strategy of broadening its product lines, price points and geographies. Also, it has been gaining from the lack of competition in the luxury new home market, its build-to-order approach and a solid backlog.

TOL currently carries a Zacks Rank #2 (Buy). Earnings estimates for fiscal 2023 have increased to $8.66 per share from $7.87 per share over the past 30 days.