Post lackluster housing market backdrop in the second half of 2018, PulteGroup Inc. PHM has been posting tepid earnings results. Although the company’s earnings in the trailing three quarter outpaced analysts’ expectation, the same either remained flat or declined on a year-over-year basis. The downside was primarily caused due to higher land, labor and material costs as well as lower market demand.
Earnings estimates for 2019, the results of which is slated to be released on Jan 28, 2020, is likely to decline 1.1% year over year to $3.55 per share. In fact, PulteGroup’s fourth-quarter 2019 earnings are expected to fall 2.7% to $1.08 per share from the year-ago quarter’s figure of $1.11.
Nevertheless, the U.S. housing industry has picked up pace and is reaching record levels on the back of strong economic fundamentals — lower rates, moderate material costs, growing demand for entry-level homes and fall in unemployment level. Despite being hurt by insufficient inventory, the industry is well poised to meet housing demand in 2020. Moreover, lesser trade frictions have also added to the positives.
Backed by the industry tailwinds, prudent land acquisition strategies and focus on entry-level buyers, PulteGroup is expected to do well in 2020. Notably, the Zacks Consensus Estimate for earnings for 2020 are currently pegged at $3.88 per share that suggests a rise of 9.4% year over year. Also, revenues are anticipated to rise 7.8% from the year-ago figure.
Shares of this Zacks Rank #3 (Hold) company have gained 8.4% in the past three months compared with the Zacks Building Products - Home Builders industry’s 1.4% growth and Zacks Construction sectors’ 5.6% rise.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
PulteGroup’s land acquisition strategy emphasizes on investment in shorter-lived smaller land assets, while expanding the use of land option agreements to mitigate market risk.
Also, the company has been maximizing the value of its land assets by selling houses on better margins, thereby utilizing the strong cash flow to invest in the business. Notably, this enables it to pay off debts and systematically return to its shareholders through share repurchase and dividends.
Additionally, PulteGroup focuses on building home for entry-level buyers. First-time/entry-level buyers, which represented 31% of orders and 29% of closings in third-quarter 2019, are boosting the top line. During the quarter, year-over-year order growth was recorded at 13%, highest third-quarter order volume since 2006 and largest new order growth rate since 2017-end. The upside can be attributed to 39% rise in first-time buyer orders.
Also, 9% absorption pace during third-quarter 2019 was driven by 22% increase from first-time communities and 8% rise from move-up communities. Notably, the company also witnessed strong backlog at the end of third-quarter 2019, backed by above-mentioned tailwinds.
Other players like Toll Brothers, Inc. TOL, NVR, Inc. NVR and D.R. Horton, Inc. DHI are also optimistic about growth prospects in the overall industry.
Higher costs related to land, labor, material and other operational expenses are persistent headwinds for PulteGroup. Labor shortages are leading to higher wages, while land prices are inflating due to limited availability.
During third-quarter 2019, adjusted gross margin declined 60 basis points (bps) from the prior-year quarter’s levels. Meanwhile, SG&A expenses — as a percentage of home sale revenues — rose 50 bps year on year.
Also, lower average sales prices or ASP is a hurdle for the homebuilder. During the third quarter, ASP for its first-time homes fell 6% to $340,000 on a year-over-year basis. Although moderate home prices bode well for the company’s initiatives to gain buyers traction, the same is exerting pressure on the bottom line.
Although high costs and expenses as well as low ASP are exerting pressure on margins, strategic initiatives and solid macro factors are likely to offset the decline.
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