On Aug 22, we maintained a Neutral recommendation on
) despite its dismal second-quarter 2013 performance as we have
faith in the company's long-term fundamentals and potential for
further margin growth.
Why a Neutral Recommendation?
Pulte announced weak second-quarter results, missing the Zacks
Consensus Estimate for both earnings and revenues. While earnings
of 26 cents per share more than doubled from the prior-year
quarter's earnings of 11 cents, it lagged the Zacks Consensus
Estimate of 29 cents by 10.3%. While total revenue grew 19.6%
year over year to $1.28 billion, it lagged the Zacks Consensus
Estimate of $1.39 billion by 7.9%. We believe the company missed
the Zacks Consensus Estimate for both earnings and revenues due
to weak net order growth.
Net orders were weak due to lower community count as the
company has been intentionally slowing down sales in some markets
due to lack of land development and scarcity of finished lots.
The company is focusing more on driving price and margin rather
than pushing up unit volumes; which we believe affected net order
growth in the quarter. Though pricing increased sharply in the
quarter, the net order decline raises concern.
Following the dismal second-quarter performance, estimates
were mostly revised downwards. Accordingly, the Zacks Consensus
Estimate for 2013 went down 13.3% while that for 2014 declined
12.3% over the last 30 days. Accordingly, Pulte carries a Zacks
Rank #5 (Strong Sell).
Moreover, the recent rising mortgage rates and possibilities
of changes in the federal lending process create an overhang.
However, Pulte's margin performance has been strong. Adjusted
homebuilding gross margins expanded 360 basis points (bps) year
over year and 100 bps sequentially in the second quarter. It was
driven by improved pricing, better mix of sales (shift toward
higher margin Pulte and Del Webb brands) and efforts to reduce
construction costs. Gross margins are expected to continue to
improve in the next 2-3 quarters.
Overall, Pulte's solid long-term fundamentals, strong cash
position and improving profitability are encouraging. Pulte's
strategic initiatives to allocate capital more efficiently,
expand margins, improve overhead leverage, increase inventory
turns and implement new pricing strategies bode well for solid
margin growth in future quarters. We thus, remain Neutral on the
stock despite the near-term weakness.
Other Stocks to Consider
Some homebuilders are currently performing well and are worth
considering. These include
Hovnanian Enterprises Inc.
Ryland Group Inc.
Meritage Homes Corporation
). All these companies carry a Zacks Rank #2 (Buy).
HOVNANIAN ENTRP (HOV): Free Stock Analysis
MERITAGE HOMES (MTH): Free Stock Analysis
PULTE GROUP ONC (PHM): Free Stock Analysis
RYLAND GRP INC (RYL): Free Stock Analysis
To read this article on Zacks.com click here.