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Why Is PulteGroup (PHM) Up 15.9% Since Last Earnings Report?

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It has been about a month since the last earnings report for PulteGroup (PHM - Free Report) . Shares have added about 15.9% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is PulteGroup due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

PulteGroup's (PHM - Free Report) Q3 Earnings Beat Estimates, Revenues Rise

PulteGroup Inc. reported impressive third-quarter 2018 results, with earnings and revenues beating the Zacks Consensus Estimate. Moreover, the company’s top and bottom lines grew considerably, courtesy of higher revenues and margin improvement.

While concerns surrounding affordability and rising mortgage rates have been plaguing the industry of late, PulteGroup remains positive on ongoing traffic trends that indicate higher inclination of buyers, thereby reflecting a slow but steady housing recovery.

The company’s earnings per share came in at $1.01, beating the consensus mark of 95 cents. The bottom line also improved 74% on a year-over-year basis. The results benefited from higher demand, backed by an improving economy and job market.

Total revenues of $2.65 billion surpassed the consensus mark of $2.60 billion and also increased 24.3% on a year-over-year basis.
 
PulteGroup primarily operates through two business segments — Homebuilding and Financial Services.

Revenues at the Homebuilding segment were up 24.6% year over year to $2.6 billion.

Home sale revenues of $2.57 billion rose 25.1% year over year on increased deliveries and average selling price. Land sale revenues totaled $25.5 million compared with $28.2 million a year ago.

The number of homes closed increased 17% year over year to 6,031. Notably, home closings were up across all operating regions of the company, namely Florida, Northeast, Southeast, Texas, Midwest and West. Average selling price (ASP) of homes delivered was $427,000, up 7% year over year.

The company’s backlog, which represents orders yet to be closed, was 11,164, up 3% year over year. Potential housing revenues from backlog increased 5% to $4.9 billion. Its backlog value was driven by a 2% increase in ASP of backlogs.

New home orders increased 1% year over year to 5,350 units in the quarter. Home orders were down in Southeast, Midwest and West, whereas up in other operating regions. Value of new orders increased 1% year over year to $2.3 billion.

Margins

Home sale gross margin expanded 10 bps year over year to 24%. Furthermore, operating margin increased 190 bps to 14.2%.
Homebuilding SG&A expenses, as a percentage of home sale revenues, were 9.8%, down 180 bps from the prior-year quarter.

Revenues from the Financial Services segment increased 9.9% year over year to $51.6 million. The segment generated pre-tax income of $20 million, up 10% year over year. Financial services benefited from higher mortgage origination volumes, owing to growth in the company’s homebuilding operations. Mortgage capture rate in the quarter was 75% compared with 80% in the year-ago quarter.

Financials

As of Sep 30, 2018, cash and cash equivalents were $728.6 million, up from $272.7 million at the end of 2017.

In the reported quarter, PulteGroup repurchased 2.4 million common shares for $67 million.

Q4 Guidance

Deliveries are expected within 6,500-6,800 homes versus 6,632 in the year-ago period. ASP is projected between $420,000 and $430,000 (versus $415,000-$425,000 expected earlier).

Goss margin in the quarter is expected at the lower end of the previous guided range of 23.8-24.3% (compared with 23.8% in the year-ago quarter). The company expects the fourth quarter to experience the brunt of lumber as well as labor inflation. SG&A is expected in the range of 9.5-10% of home sale revenues.

2018 Guidance

Home closing is expected in the range of 22,500-23,500 homes. Guidance for 3-5% community growth remains unchanged. Community growth of 8% in the third quarter was the result of slower-than-expected close outs due to hurricanes in the Southeast, along with weaker demand in Seattle and Northern California.

The company expects to generate between $1 billion and $1.2 billion of cash flow in 2018 versus $900 million expected earlier.

The company remains on track with its plan to increase spending on land acquisition/development by 10% in 2018.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates.

VGM Scores

Currently, PulteGroup has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, PulteGroup has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.




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