Pulte Homes Sees Growth In U.S. Housing Recovery
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 performers.
Bloomfield Hills, Mich.-basedPulte Group ( PHM ) 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 improvements.
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 34 cents.
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 released.
Even so, Pulte shares may find the going somewhat tougher in coming months.
For one thing, Pulte is still dogged by leftover problems from the underwriting of loans during the go-go years of lax lending standards.
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 macroeconomics.
"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.