We have maintained our Neutral recommendation on
) appraisal of the third quarter results.
PulteGroup's third quarter 2012 adjusted earnings of 27 cents
per share beat the Zacks Consensus Estimate by 35%. Earnings were
significantly better than the adjusted earnings of $11 cents in
the prior-year quarter, driven by improved home demand and
pricing, gross margin expansion and solid overhead leverage.
Pulte's homebuilding revenues rose 12.7%, driven by an increase
in new home orders and average selling prices.
New home orders were up 27% year over year based on the
improvement in new home demand. The average selling price rose 5%
as Pulte raised prices in almost 70% of its markets in the
quarter. 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
for the remainder of 2012.
With a gradual recovery in the overall economy, the
homebuilding industry is finally seeing signs of stabilization in
2012. The overall U.S. housing market has seen a meaningful
increase in the volume of new home sales for the first nine
months of 2012 with industry-wide sales tracking roughly 25%
above prior-year levels. We believe that the housing market is
starting to benefit from an increase in employment rates, higher
consumer confidence and several years of pent-up demand. Houses
are more affordable now as mortgage loans come with record low
interest rates, while renting has become more expensive.
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
The company is continuously evaluating its assets and
prioritizing markets and projects in order to allocate capital
appropriately and to invest selectively in high return projects.
The company is divesting lower margin projects and exiting
non-performing communities and lower margin land lots, which no
longer fit into their operating strategy, thus freeing up cash to
invest in other potential opportunities, which could generate
higher returns. Pulte is also utilizing its existing land assets
more efficiently and lowering its unsold inventory levels more
aggressively, which in turn are benefiting the working capital
and margins. Moreover, while the company monetizes non-profitable
existing assets, it is disciplined in adding new land positions.
The company is also shifting its focus toward steeply priced
Pulte branded move-up homes, which will likely improve the
overall average selling prices.
In addition to allocating capital more efficiently, Pulte is
taking other actions to improve its operating and financial
performance. These initiatives include improvement of overhead
leverage and implementing new pricing strategies. These
initiatives will better place the company when the housing
conditions improve in the long term.
Though the housing market is showing signs of stabilization in
2012, management believes that the process is erratic and not yet
adequately broad-based. A speedy housing recovery is unlikely and
the timing of the markets to fully recover and return to a more
historically typical operating environment is uncertain.
Pulte carries a Zacks #2 Rank (short-term Buy rating). Peer
) also carries the same rank, thus highlighting the positive
momentum in the housing industry.
LENNAR CORP -A (LEN): Free Stock Analysis
PULTE GROUP ONC (PHM): Free Stock Analysis
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