Homebuilders were leveled by the bursting of the housing
bubble several years ago. But the sweet scent of fresh lumber has
more recently been in the air.
With sales of new and existing homes, as well as prices,
generally on the rise, homebuilder stocks have been strong market
Bloomfield Hills, Mich.-basedPulte Group (
) has been one of the leaders. Shares began 2012 trading at just
over $6. Since then, they have more than tripled.
Those share gains have reflected the nascent industry recovery
as well as Pulte's own operational and financial
As recently as 2010, Pulte was forced to take a charge against
earnings of nearly $1 billion. But now sales have picked up, and
so have profit margins.
In the fourth quarter, Pulte revenue rose by 25% to $1.57
billion. That gain was compounded by both rising sales and
prices. The 5,154 home closings represented a rise of 20%. At
$287,000, average selling prices were up 6%.
New orders, harbingers of future growth, were up 27%.
Excluding special charges, Pulte reported earnings per share of
Analysts say Pulte has done well to ride the general housing
recovery with increased operational efficiency.
"Pulte has made big strides in a short period," said RBC
Capital Markets analyst Robert Wetenhall. "The company's focus on
increasing gross margins, leveraging overhead costs and
accelerating inventory turns will clearly result in greater
profitability," he added.
Housing bulls and bears have argued the durability of the
fragile housing recovery every step of the way. But with each new
monthly report of price and sales recovery, the bulls have
gradually gained the upper hand.
Optimism ruled when CEO Richard Dugas addressed analysts Jan.
31. "Looking ahead to 2013, we have every reason to expect that
housing has indeed turned the corner and that industry sales in
2013 can continue to move higher as pent-up demand is
Even so, Pulte shares may find the going somewhat tougher in
For one thing, Pulte is still dogged by leftover problems from
the underwriting of loans during the go-go years of lax lending
Both banks and government-sponsored enterprises Fannie Mae and
Freddie Mac have contested the underwriting of many Pulte
mortgages, seeking compensation when loans default. Last quarter,
Pulte set aside an added $49 million to resolve such issues,
known as mortgage "put-backs."
In a written reply to questions from IBD, CEO Richard Dugas
explained: "As a mortgage originator who sells the loan, we have
ongoing representation and warranty risk primarily around the
mortgage having been underwritten properly and that the homebuyer
did not commit fraud in applying for the loan. For certain
mortgages that default, the banks and GSEs that held the paper
are alleging that the mortgage may have not been properly
originated and they are asking to be made whole on any losses
they have suffered."
Could such mortgage put-backs become an even more vexing issue
and result in further charges?
"It's really hard to say," replied Megan McGrath, an analyst
with MKM Partners.
Much of the mortgage renegotiation drama is played offstage,
out of court, between attorneys.
"The lawyers are arguing," said McGrath, noting that there are
"all sorts of different negotiations" now taking place between
loan originators like Pulte, and the banks, investors and GSEs
who once bought or still hold the questionable mortgages.
"It's a risk," said McGrath of future charges to resolve these
issues. But she feels the $49 million reserve should suffice for
now. "I don't expect another charge within the next several
quarters," she said.
RBC Capital Markets analyst Wetenhall is a bit more optimistic
on Pulte's exposure to further mortgage put-backs. "It seems they
have it under control," he said.
The bullish argument for Pulte rests largely on its huge
inventory of land.
Pulte, which has built homes in 29 states, currently has a
roughly eight-year supply of lots on which to build, estimates
McGrath. Rising land prices should give Pulte the opportunity to
expand margins, as it has locked in fixed costs.
This dynamic has already come into play, according to CEO
Dugas. "As house prices have started to increase over the past 12
to 18 months, our margins have certainly benefited, given that
our lot costs on these sales were essentially fixed," he wrote in
response to IBD questions.
Pulte should also benefit, theoretically at least, if land
values keep rising. If nothing else, the huge holdings of
undeveloped land could serve as a "shield" against potential land
price inflation," said KeyBanc analyst Kenneth Zener.
"Pulte's land position and ongoing focus on production
efficiencies remain factors that can deliver margins above past
normalized levels," said Zener.
But analyst McGrath contests the bullish premise on Pulte land
holdings. "Yes, it's a lot of land, but the Pulte land itself is
not particularly valuable," she said. "The land that they hold is
often in less desirable locales."
Current housing demand is coming largely from repeat buyers,
not first-time buyers. But much of Pulte's land might better
serve those first-time buyers willing to live a bit further out
from core cities. And demand from this sort of buyer is still
relatively quiescent. "When the first-time buyers come back into
the market, they will use that land," said McGrath.
Until then, Pulte will rely on its own continuing efforts to
improve financial efficiency, along with improving housing
"The macro numbers in terms of population growth, household
and job formation, low interest rates and high rental rates, all
support the trend toward increased demand," said CEO Dugas.
The future looks bright so long as the past doesn't keep
nipping at Pulte's heels.