We maintained our Neutral recommendation on
) following appraisal of the second quarter results.
We are encouraged by Pulte's solid second quarter results and
bullish growth projection for the second half, backed by gradually
recovering homebuilding market.
Second quarter adjusted earnings of 13 cents per share beat the
Zacks Consensus Estimates by 160% and were significantly better
than an adjusted loss of $0.04 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 five years. Homebuilding revenues were up 14% driven
by an increase in new home orders and average selling prices.
New home orders were up 32% due to improvement in new home demand.
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
With a gradual recovery in the overall economy, the homebuilding
industry is finally seeing signs of stabilization in 2012. The
downturn during 2006-2007 had hurt the homebuilding sector hard. 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 relatively low interest rates, while
renting becomes 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 recover.
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 the company is
freeing up cash to invest in other potential opportunities that
could generate higher returns. It is also using its existing land
assets more efficiently and lowering its unsold inventory levels
more aggressively, which is in turn benefitting working capital and
margins. The company is also shifting focus towards steeply-priced
Pulte branded move-up homes, which improves overall average selling
prices. A better mix of sales, particularly Pulte branded move-up
homes, as well as addition of new higher margin communities drove
the company's adjusted gross margins in the second quarter of 2012
to post sixth-consecutive sequential gain.
In addition to allocating capital more efficiently, Pulte is
taking other actions to improve its operating and financial
performance. These initiatives include steps to expand margins,
improve overhead leverage, manage inventory tightly and implement
new pricing strategies. These initiatives will better place the
company when the housing conditions improve in the long term.
Though there have been signs of a nascent improvement in new
home demand so far in 2012, the process of stabilization is not
adequately broad-based. The housing market improvement has been
uneven across the country. Most of the gains have, by and large,
been observed in high-end communities. In addition, homebuilders
are still facing impediments in raising prices in some markets.
Overall demand still remains constrained due to tight credit
standards, which make it difficult to obtain home loans. Thus, we
prefer to remain on the sidelines until we witness a substantial
recovery in the overall housing market.
PULTE GROUP ONC (PHM): Free Stock Analysis
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