Technology

Why Is PulteGroup (PHM) Up 15% Since Last Earnings Report?

It has been about a month since the last earnings report for PulteGroup (PHM). Shares have added about 15% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is PulteGroup due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

PulteGroup’s (PHM) Q2 Earnings & Revenues Beat Estimates

PulteGroup Inc. reported second-quarter 2020 results, wherein earnings and revenues handily surpassed the Zacks Consensus Estimate, buoyed by a recovery in demand. Ryan Marshall, president and chief executive officer of PulteGroup, pointed out, “The recovery in demand reflects a number of factors, including: low interest rates, a restricted supply of existing-home inventory, pent-up demand following the economic shutdown, the appeal of single-family living in a new home and a desire among some buyers to exit more densely populated urban centers.”

Inside the Headlines

Adjusted earnings per share came in at $1.15, beating the consensus mark of 84 cents by 36.9%. The bottom line also grew 33.7% year over year.

Total revenues of $2.59 billion surpassed the consensus mark of $2.54 billion by 2% and increased 4.2% from the year-ago figure of $2.49 billion.

Segment Discussion

PulteGroup primarily operates through two business segments — Homebuilding and Financial Services.

Revenues from the Homebuilding segment were up 2.7% year over year to $2.5 billion. Home sale revenues of $2.47 billion also improved 2.8% year over year, given higher deliveries. However, land sale revenues declined 8.5% from a year ago to $27 million.

The number of homes closed increased 6% year over year to 5,937. Home closings grew across most of the operating regions served (barring Northeast and Midwest). Average selling price of homes delivered was $416,000, down 3% year over year due to the company’s shift in the product mix to include more first-time homebuyers.

Importantly, its backlog — which represents orders yet to be closed — was 13,214, up 12% year over year. In addition, potential housing revenues from backlog increased 13.3% from the prior-year quarter to $5.79 billion.

However, new home orders decreased 4% year over year to 6,522 units in the quarter. Home orders were down across all operating regions served (except Florida and Texas). Value of new orders also declined 7.4% from a year ago to $2.68 billion.

Margins

Home sales gross margin was up 80 basis points (bps) year over year to 23.9% in the quarter. Furthermore, operating margin expanded 370 bps to 16%. Adjusted operating margin also expanded 160 bps year over year to 13.9% in the quarter.

Adjusted homebuilding SG&A expenses — as a percentage of home sale revenues — were 10%, down 80 bps from the prior-year quarter.

Revenues from the Financial Services segment improved 69.4% year over year to $94.8 million. The segment generated a pre-tax income of $60.4 million, up 140.9% from $25.1 million a year ago. Mortgage capture rate in the second quarter increased to 87% from 81% last year.

Financials

As of Jun 30, 2020, cash and cash equivalents were $1.66 billion, up from $1.22 billion at 2019-end. It repaid the $700 million that it borrowed from the revolving credit facility in March 2020. Given economic uncertainties, it has opted to suspend all stock repurchase activities.

Q3 Guidance

Deliveries are expected within 6,000-6,300 homes. That said, at the midpoint, the guided range represents a decrease from 6,186 in the year-ago period. ASP is projected between $425,000 and $435,000, compared with $426,000 registered a year ago. SG&A expense for quarter is expected to be 9.9-10.4% of home sale revenues.

Homebuilding gross margin for the quarter is guided in the range of 23.9-24.2% (compared with 23.4% in the year-ago period). It expects gross margins to remain strong through the back half of 2020.

2020 Guidance

ASP is expected between $420,000 and $430,000 (compared with $427,000 in 2019). Home closing or deliveries are expected within 23,500 — 24,000 homes, compared with 23,232 in 2019.

Homebuilding gross margin is guided in the range of 23.8-24.1% (compared with 22.8% in 2019). Adjusted SG&A expense for the full year is expected to be 10.3-10.7% of home sale revenues.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates revision. The consensus estimate has shifted 51.37% due to these changes.

VGM Scores

Currently, PulteGroup has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. However, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise PulteGroup has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.


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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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