On Jun 19, we maintained a Neutral recommendation on
PulteGroup Inc. (
. While solid first-quarter 2013 results and improving housing
fundamentals raise optimism, the overall weak economy and tight
mortgage lending standards keep us sidelined.
Why the Neutral Recommendation?
On Apr 25, this leading national homebuilder announced
first-quarter earnings of 21 cents per share, which beat the
Zacks Consensus Estimate by 31.3%. Moreover, the company swung
back to earnings from the prior-year quarter's loss of 3 cents
The earnings were driven by solid gross margin expansion and
significant overhead leverage which made up for a somewhat
lukewarm net order growth in the quarter.
Total revenue also beat the Zacks Consensus Estimate and grew
31.8% year over year. The company's strategic initiatives to
expand margins, improve overhead leverage, increase inventory
turns and give higher returns helped it to better capitalize on
the improvement in the broader housing market.
Pulte's Homebuilding revenues rose 32.1% driven largely by
better average selling prices (ASPs) as the net order growth was
slightly muted. Though net orders grew only 4% in the quarter, it
is not a matter of concern as the company is intentionally
slowing sales pace. Instead, it aims to raise prices and drive
margins in most communities.
Estimates mostly moved upwards after the announcement of the
solid first-quarter results. The Zacks Consensus Estimate for
2013 increased almost 20% and that for 2014 went up almost 4%
over the past 60 days.
We believe that homebuilders like Pulte, which enjoy
significant land positions, broad geographic and product
diversity and better capital positions, will take maximum
advantage of the housing recovery. We also believe that Pulte's
cost reduction and operating efficiency improvement plans
combined with further improvement in housing demand will boost
profitability in 2013.
Notwithstanding the improving trend, demand for new homes in
the U.S. remains at historically low levels due to the currently
weak economic conditions and tight mortgage lending standards.
Consumers will remain cautious until the employment scenario
improves; home prices appreciate further and access to the credit
markets eases. Sustainable increases in housing and housing
demand for the long term will require the overall economy to
strengthen; including further job growth which we believe will
Rising input costs is also a concern due to the increasing
costs of raw material and labor. As housing starts
accelerate, both labor and construction material costs continue
to experience upward pricing pressure, which could prove to be a
major deterrent for margins in the future quarters.
Other Stocks to Consider
Pulte carries a Zacks Rank #2 (Buy). Other stocks in the
homebuilding sector that are performing well include
D. R. Horton Inc.
Ryland Group Inc.
Meritage Homes Corporation
). All three stocks carry a Zacks Rank #1 (Strong Buy).
D R HORTON INC (DHI): Free Stock Analysis
MERITAGE HOMES (MTH): Free Stock Analysis
PULTE GROUP ONC (PHM): Free Stock Analysis
RYLAND GRP INC (RYL): Free Stock Analysis
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