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.