Pulte Group, Inc
. (
PHM
) turned around from a loss in the first quarter to adjusted
earnings of 9 cents per share in the second quarter of 2012. The
earnings beat the Zacks Consensus Estimates by 80% and were
significantly better than an adjusted loss of 4 cents in the
prior-year quarter. Improved homebuilding revenues, expanded
margins and the company's strategic initiatives led to this U.S.
homebuilder's strongest earnings performance in the past five
years.
The company conducts its operations in two primary business
segments - Homebuilding and Financial Services. Pulte Group
reported total revenue of $1.07 billion in the second quarter, up
15% from the prior-year quarter due to solid homebuilding revenues.
Total revenues, however, missed the Zacks Consensus Estimate of
$1.10 billion.
A recovering homebuilding market combined with Pulte Group's
cost reduction and operating efficiency improvement initiatives led
to the top- and bottom-line beat in the quarter.
Homebuilding
Pulte's homebuilding revenues, derived from popular brands like
Pulte Homes, Centex and Del Webb, rose by 14.3% to $1.03 billion,
driven by an increase in new home orders and average selling
prices. Home sales increased 14% to $1.02 billion while land sales
shot up 78% to $8.7 million in the quarter.
New home orders were up 32% year over year and 12% sequentially
to 5,578 homes in the quarter due to improvement in new home demand
despite a 7% decline in the number of communities. The boom in the
net order book was attributed to a stabilizing recovery in the
housing market. This was backed by low home prices and moderating
interest rates while renting became a more expensive option luring
buyers to new homes.
Home closings were up 5% year over year to 3,816 homes in the
reported quarter. The average sales price of homes delivered stood
at $268,000, up 8% year over year. A better product mix, comprising
increased home closings of steeply priced move-up homes pushed up
the average selling price in the quarter.
The company's ending backlog, which represents orders which have
not yet closed, was 7,560 homes, up 31% year over year.
Adjusted homebuilding gross margins expanded 320 basis points
over the prior-year quarter and 160 basis points sequentially to
20.3% of home sale revenues. It was driven by pricing benefits,
operating efficiency improvement initiatives and a better mix of
sales, particularly of move-up homes. Homebuilding operating
margins expanded more than 600 basis points driven by gross margin
gains and the cost reductions.
Continuous reduction in overhead costs brought down the selling,
general and administrative expenses by 10% to $124 million,
representing 12.1% of homebuilding revenues.
Financial Services
Revenues in the company's Financial Services scaled up 62.0% to
$36.3 million. The segment recorded a pretax income of $16 million
in the quarter compared with an adjusted profit of $2 million in
the second quarter of 2011 due to better loan originations and
favorable market conditions.
Financial Position
Pulte had cash and cash equivalents of $1.4 billion as of June
30, 2012 compared with $1.3 billion as of March 31, 2012.
Outlook
The last few years have seen a very fragile housing market. The
downturn in the housing industry, aggravated by an overall weak
economy, high unemployment rates, low consumer confidence, rising
interest rates and tightened mortgage lending standards, has been
weighing down on homebuilders like Pulte Group and its compatriots
KB Home
(
KBH
),
DR Horton Inc.
(
DHI
) and
Lennar Corporation
(
LEN
).
The company is seeing a definite improvement in demand in the
homebuilding sector and believes its cost reduction and operating
efficiency improvement plans will lead to profitability in 2012.
The second-quarter results are a case in point.
As part of its cost reduction program, Pulte has made
significant workforce reductions and is also aggressively working
to cut overhead costs. In 2011, the company consolidated its field
organization and select corporate functions. It has also
consolidated its regional operations in Arizona, Florida, New York
and New Jersey and merged its West and Central areas.
Moreover, the homebuilder is divesting lower-margin projects and
exiting non-performing communities which no longer fit into the
company's operating strategy. The move has helped to free up cash
to invest in other potential opportunities which generate higher
returns.
Our Recommendation
We currently have a Neutral recommendation on Pulte Group. The
stock carries a Zacks #2 Rank in the near term (Buy rating).
We believe that homebuilders like Pulte with significant land
positions, broad geographic and product diversity, and better
capital positions are expected to benefit the most as market
conditions recover. Though the demand trends are slowly improving,
we would still prefer to remain on the sidelines until we witness a
speedy and broad-based recovery in the overall housing market.
D R HORTON INC (DHI): Free Stock Analysis
Report
KB HOME (KBH): Free Stock Analysis Report
LENNAR CORP -A (LEN): Free Stock Analysis
Report
PULTE GROUP ONC (PHM): Free Stock Analysis
Report
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