PulteGroup Inc. (PHM - Free Report) is riding high on prudent land acquisition strategies that have resulted in improved volumes, revenues and profitability for quite some time now. However, rising land and labor costs, as well materials expenses raise concerns.
Meanwhile, shares of PulteGroup have outperformed its industry so far this year. Also, earnings estimates for 2018 have moved 2% north over the past 30 days, signaling analysts’ optimism surrounding the stock’s earnings growth prospect.
Let’s delve deeper into the factors that substantiate its Zacks Rank #3 (Hold).
Key Growth Drivers
PulteGroup benefits from robust end-market demand and improving housing market prospects. The company has adopted various strategic initiatives that have the potential to improve volumes, revenues and profitability.
PulteGroup is also maximizing the value of its land assets by selling houses at higher prices and better margins, thereby utilizing the resulting strong cash flow to invest in the business, in turn enabling to pay off debts and systematically return to its shareholders. Its land strategy emphasizes on investing in shorter-lived smaller land assets, while expanding the use of land option agreements when possible, thereby mitigating market risk. In the third quarter of 2018, the company had approximately 150,000 lots under control, out of which nearly 41% was controlled via option.
As part of its strategy, the company started disposing off a few non-core and underutilized assets, in order to drive greater asset efficiency and higher returns on invested capital. Backed by the above-mentioned initiatives, its homebuilding revenues in the first nine months of 2018 grew 24.7% year over year.
Notably, SG&A expenses, as a percentage of home sale revenues, in the same period improved 190 basis points from the prior-year quarter. While concerns surrounding affordability and rising mortgage rates have been plaguing the industry of late, PulteGroup, similar to other homebuilders, remains positive on ongoing traffic trends that indicate higher inclination of buyers, thereby reflecting a slow but steady housing recovery.
Overall housing market fundamentals remain positive, backed by steady job and wage growth, a recovering economy.
Ongoing housing market headwinds have impacted the homebuilding industry’s performance as a whole (down 34.5% year to date). Although PulteGroup’s shares have outperformed its industry, it declined 26.7% in the period.
Factors like rising labor, land and material costs have been putting up hurdles for homebuilders like PulteGroup and others. In fact, the company now expects gross margin in the fourth quarter to come in at the lower end of the guided range of 23.8-24.3%, thanks to lumber as well as labor inflation.
Stocks to Consider
Some better-ranked stocks in the Zacks Construction sector include Armstrong Flooring, Inc. (AFI - Free Report) , EMCOR Group, Inc. (EME - Free Report) and Jacobs Engineering Group Inc. (JEC - Free Report) . While Armstrong Flooring sports a Zacks Rank #1 (Strong Buy), EMCOR and Jacobs both carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Armstrong Flooring, EMCOR and Jacobs’ earnings for the current year are expected to increase 114.3%, 20%, and 35.2%, respectively.
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