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PulteGroup: Housing Market Strong, Margins Remain Weak

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On Nov 29, we issued an updated research report on PulteGroup Inc. (PHM - Free Report) which engages in homebuilding and financial services, primarily in the U.S.

PulteGroup benefits from its value-creation strategy as it focuses on generating solid returns, maintains strong margins, with balanced approach across its portfolio and capital allocation plans. The steadily improving housing market, strong backlog position, focus on higher-return businesses and the recent Wieland acquisition might boost results in the rest of 2016.

PulteGroup’s third-quarter earnings were in line with the Zacks Consensus Estimate while revenues missed the same. The company reported third-quarter 2016 adjusted earnings of 43 cents per share which increased 30.3% from the year-ago quarter adjusted figure of 33 cents on the back of higher home sales and lower share count .
PulteGroup’s total revenue of $1.94 billion missed the Zacks Consensus Estimate of $1.95 billion by 0.5%. Revenues were, however, up 28.9% year over year on an increase in the number of homes delivered.

Housing Market Positive

Despite a weak start this year amid equity market volatility and global concerns, the construction sector seems to have recovered on the back of strong housing fundamentals. The company is on track to generate 10% higher 2016 U.S. new home sales in comparison to last year, given positives like an improving economy, modest wage growth, improved employment levels, low interest rates, positive consumer confidence and a tight supply environment. The company’s backlog grew 20% to $3.7 billion as of Sep 30,2016.

Improving labor markets, declining unemployment rates, low mortgage rates and a limited home supply are supporting a continued rise in home prices, thereby booting homebuilders’ top line.

Gross Margin Weak

PulteGroup has been posting weak gross margins for the last few quarters. In the first nine months of the year, the home sales gross margin declined 180 basis points on a year-over-year basis to 21.4%. The company provided a weak gross margin guidance of 20.5–21% for fourth-quarter 2016, lower than the prior guidance. Further, it expects margins to remain weak in full-year 2017 as well, thanks to higher labor and material costs.

PulteGroup carries a Zacks Rank #3 (Hold).

Stocks to Consider

Better-ranked stocks in the construction sector include Beazer Homes USA, Inc. (BZH - Free Report) , Hovnanian Enterprises Inc. and Toll Brothers Inc. (TOL - Free Report) .

All three companies carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1(Strong Buy) Rank stocks here

Fiscal 2017 earnings for Beazer are expected to decline 2.8%.

Hovnanian is expected to witness 190.9% growth in fiscal 2016 earnings.

Fiscal 2016 earnings for Toll Brothers are expected to rise 21.9%.

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