Builder Pulse

PulteGroup Q2: More from less

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PulteGroup has something to prove, and it's doing it the less-is-more way. Here are the Pulte focus points as it releases what analysts concur either met or exceeded their expectations for its second quarter earnings, prior to market open this morning:

- Q2 Net Income of $42 Million, or $0.11 Per Share

 - Company Remains on Track for Full-Year Profitability

- 32% Increase in Net New Orders to 5,578 Homes Realized from 7% Fewer Communities

- Adjusted Gross Margin of 20.3% Increased 320 Basis Points from Prior Year and 160 Basis Points from Q1 2012

- Unit Backlog Up 31% to 7,560 Homes Valued at $2.2 Billion

- Quarter-End Cash of $1.4 Billion, an Increase of $96 Million from Q1 2012

A word comes to mind after all the grief Pulte leadership took in the wake of its 2009 acquistion of Centex Homes: Vindication. A massive operational integration in the throes of a housing depression didn't play well with backseat drivers for a couple of years, but it seems now as if the equities analysts who follow the company have finally bought into the strategic impetus, operational cohesion, and execution through continued adversity in the markets.

Pulte, D.R. Horton, and Lennar perhaps serve best as a proxy for the broader residential construction plot line right now, as their geographical footprints, product line offerings, and exposures to varying local economic trends translate into a scenario for how financially advantaged players in the new-home market will leverage their ability to help home buyers qualify for mortgage to price, pace, and marketshare gains.

Pulte's order growth and gross margins walloped The Street, indicating its strategic program well exceeds the analysts' grasp of it. Here's what a sampling of equities analysts has to say ahead of a call with investors and analysts this morning:


Stephen East, ISI Homebuilding

PHM turned in an exceptional quarter that was well ahead of our, and the Street's, expectations.  Virtually every metric, including Orders, margin and EPS exceeded forecasts.  This is now the fourth quarter in a row of very solid execution-some of the best in the group.  The mortgage putback issue is still unresolved, but at this point, the fundamental performance argues mightily for a much stronger valuation versus its peers.  PHM has turned the corner and is accelerating, we expect its equity to outperform as well.

EPS was $0.11, with $0.02 in charges, well ahead of our $0.09 estimate and consensus of $0.05.  Charges were $8M that included land and restructuring charges.

Orders were outstanding, up 32% to 5,578, much stronger than our 18% estimate and the Street's paltry 7% estimate.  This result was on a 7% lower community count.  Every region except Florida beat our forecast, with the Southwest, Texas and North regions significantly outperforming.  Further, the pricing was much stronger, up 9% to $288K, ahead of our $270K projection.  No matter how one slices it, this was an impressive pickup.

Revenues were as expected with Home sales checking in at $1B.  Pricing was stronger, up 8%, while unit deliveries were less than expected, up 8% versus our 11% estimate. 

The fully loaded Operating Margin was 3.2%, just slightly ahead of our 3% estimate, with the beat being of higher quality, i.e., from the gross margin.  We forecasted a 14% Gross Margin but checked in at 15.2%, up 270 bps YoY, as better pricing, lower specs, mix and construction efficiency all boosted the results.  SG&A was the only useful miss in the release, coming in at 12.1% versus our 11.5%.  Interest Expense was 5% of sales versus our targeted 4.8%.

Financial Services added a strong $16M, well ahead of our $5M operating profit target.  No putback reserves were taken and there was no commentary about the issue.

Focus areas for the call include:  1) an update on the Putback risks; 2) Debt refinance/reduction plans;   3) land and construction costs;  4) Monthly trends including a Del Webb breakout;  5) Pricing dynamics.


David Goldberg, UBS Securities

Outperformance Realized Broadly Across the Business

* Pulte reported 2Q EPS of $0.06, based on a normalized tax rate, ahead of our estimate of $0.03. The outperformance was driven by a combination of: 1) a greater contribution from financial services, +~$0.01 to EPS; 2) better profitability in the HB segment-EBIT margins were ~70bps ahead of our forecast-+~$0.01 to EPS; and 3) lower than expected impairments, which also added ~$0.01. These benefits more than offset the negative impact from lower than expected HB revs, which rose 14% YOY vs. our 18% estimate. 

Benefit of Product Diversity Materializes in Order Growth

* Unit orders were +32% YOY, ahead of our +12% expectation, despite community count -7% YOY. Given Pulte's broad product diversity, we'll be looking for color from mgmt on whether these results support our view that entry-level growth, while positive, is more constrained relative to the move-up/active adult businesses. 

Liquidity Continues to Improve, A Trend that Should Continue

* Liquidity continued to improve in 2Q, as cash was $1.4bn, +$96mn seq. In turn, the co's net debt to cap is now ~32% (adj for tax benefits). We expect Pulte to generate more cash vs. peers early in the cycle, driven by Del Webb, as these communities require more significant upfront capital investment. As such, we believe PHM's current capital structure could support significant growth.

Valuation: PT $9 is 1.3x Current Book Value

Michael Rehaut, JP Morgan

PHM reported 2Q EPS of $0.11, modestly above our $0.09E and the Street's $0.06. Also, positively, YOY order growth of 32% was solidly above our 20%E, driven by a 41% rise in its absorption rate (using average communities), which we note is similar to other builders' order growth results reported so far, including RYL, MTH and BZH, up 42%, 49% and 28%, respectively. Moreover, gross margins (ex-charges and interest expense) continued to demonstrate solid improvement, rising 160 bps sequentially and 320 bps YOY to 20.3%, above our 18.6%E, driven by pricing initiatives, improved construction efficiencies and less spec inventory. Results also featured land and restructuring charges of $8 million, roughly in-line with our $6 million estimate. Overall, we maintain our relative Neutral rating amid our selective sector stance, as we believe PHM's valuation properly reflects its above average mortgage putback risk and our outlook for below average order growth, roughly offset by its solid cash balance and its diversified geographic and demographic positioning.

Orders rise 32% YOY, solidly above our 20%E, led by the Southwest. The rise in orders was driven by a 41% increase in absorption (using average communities) to 7.5 orders per community per quarter, above our 29%E, as average community count declined 6% YOY, roughly in-line with our -7%E. Moreover, by region, the Southwest rose 70%, the North, Texas and Northeast, rose 40%, 31% and 21%, respectively, while the Southeast and Florida rose 12% and 11%.
  • Core operating margins moderately above our estimate. Specifically, gross margins (ex-charges and interest) rose 160 bps sequentially and 320 bps YOY to 20.3%, above our 18.6%E, driven by a favorable mix of home closings and improved pricing, as well as greater construction efficiencies and strategic pricing initiatives. However, the company's SG&A ratio (ex-items) of 12.1%, while down 300 bps sequentially and 200 bps YOY, was above our 11.1%E, we believe in part due to lesser than expected leverage as homebuilding revenue grew 14% vs. our 24%E (driven by closings up 5% vs. our 18%E). As a result, core operating margins rose 460 bps sequentially and 520 bps YOY to 8.2%, above our 7.5%E.
  • Net debt-to-cap declines. Specifically, the company's cash balance rose $96 million sequentially and $194 million YOY to $1.4 billion, and as a result, its net debt-to-cap declined 190 bps sequentially and 470 bps YOY to 46.2%, below our universe average (ex-NVR) of 53%.

    Adam Rudiger, Wells Fargo

    PHM REPORTED Q2 EPS OF $0.11 VS. OUR $0.07 ESTIMATE. Consensus was $0.05. Upside to our estimate was driven by better than expected home sales gross margin (15.2% vs. our 13.5% E) and higher than expected financial services income ($16MM vs. our $6MM E). Home sales revenue of $1,024MM was below our $1,063MM E. Other negative offsets included worse than expected SG&A/sales (12.1% vs. our 11.5% E) and higher than expected other expense ($8MM, while we modeled other income of $1MM). Positively, orders rose 32% yr/yr, ahead of our 12% E. Closings increased 5%, below our 12% E.


    TAKEAWAYS: This was a generally good quarter for PHM with a solid 32% increase in orders despite a 7% yr/yr decline in community count. While all regions posted order growth, the Southwest was the strongest, improving 70% yr/yr. Conversely, the Southeast and Florida, which collectively accounted for 27% orders this quarter, increased just 12% -- highlighting that thus far the recovery has not been consistent across all markets. Importantly, gross margins improved by almost 300 bps yr/yr, although we note they are still below a ''normal'' range and are just 100 bps above 2010 levels. On the cost line, SG&A was above our estimates, but PHM saw good operating leverage with almost no sequential change despite a 26% sequential increase in home sales revenue.





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    About the Blogger

    John McManus

    thumbnail image John McManus is an award-winning editorial director for the Residential Construction Group at Hanley Wood in Washington, DC. In addition to the Builder digital, print, and in-person editorial and programming portfolio, the group includes strategic content direction for Affordable Housing Finance, Apartment Finance Today, Custom Home, Multifamily Executive, and Residential Architect.