PulteGroup Down to Neutral - Analyst Blog
April 09 2012 - 12:03PM
Zacks
We recently downgraded our rating on PulteGroup
Inc. (PHM) from Outperform to Neutral due to continued
weakness in the homebuilding market.
PulteGroup reported earnings per share of 11 cents in the fourth
quarter of 2011, exceeding the Zacks Consensus Estimate of 8 cents
and the year-ago figure of 1 cent per share. Improved gross margins
and reduced overhead costs boosted earnings, despite a nominal
increase in revenue.
Pulte’s homebuilding revenues rose marginally by 1% to $1.2
billion from the fourth quarter of 2010. The increase in revenues
was attributable to a 3% increase in average selling prices to
$271,000, which was partially offset by a 2% decrease in closings
to 4,303 homes. The adjusted gross margin expanded 200 basis points
in the quarter to 18.6% of home sale revenues, driven by a better
mix of sales, particularly of move-up homes, as well as the
addition of newer higher margin communities.
We are encouraged by the company’s initiatives to improve its
operating and financial performance. These initiatives include
steps to manage margins, overhead and inventory; initiating new
pricing strategies and reweighing its market position. These
strategies would better place the company over the long haul once
the homebuilding market fully recovers.
As part of its cost reduction program, Pulte has made
significant workforce reductions and is also aggressively working
to reduce overhead costs. In 2011, the company consolidated its
field organization and select corporate functions. It has also
consolidated its regional operations in Arizona, Florida, New York
and New Jersey and merged its West and Central area. The continued
reduction in overhead costs has pulled down the company’s Selling,
General and Administrative (SG&A) expenses substantially in
2011 and subsequently increased margins.
The company is also 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 which no longer fit into the company’s
operating strategy. This helps free up cash to invest in other
potential opportunities which generate higher returns.
However, the homebuilding industry has been fragile, which has
largely affected operations of the company in all its markets in
the last few years. The company, like its compatriots DR
Horton, Inc. (DHI), KB Home (KBH) and
Lennar Corporation (LEN), has witnessed declining
demand for new homes due to high unemployment rates, low consumer
confidence, rising interest rates and tightened mortgage lending
standards.
Other than that, the housing market has become extremely
aggressive and the company’s new homes faced tough competition from
housing alternatives, including resale homes, foreclosed homes,
short sale homes and rental housing. In the US, new home sales were
approximately $0.3 million in 2011. This reflects a sharp decline
from the 2005 peak of 1.3 million new homes sales.
The weakened demand heightened pricing pressures on new and
existing home sales, which when combined with the changes in a
geographic mix of homes closed, resulted in significant decreases
in the average unit selling price from peak 2007 levels.
The company maintains a cautious outlook for 2012 due to
uncertainty in the timing of recovery in the homebuilding industry.
The community count is expected to continue to decline between 5%
and 10% during 2012 which could convert into below-average order
growth in the year. We prefer to remain on the sidelines until we
see any meaningful recovery in the broader homebuilding market.
D R HORTON INC (DHI): Free Stock Analysis Report
KB HOME (KBH): Free Stock Analysis Report
LENNAR CORP -A (LEN): Free Stock Analysis Report
PULTE GROUP ONC (PHM): Free Stock Analysis Report
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