PulteGroup may be making quick paces back to profitability following its merger with Centex last year, but analysts participating in the related earnings call May 5 appeared to view management's strategic plan to grow the company with some suspicion.
The company handily beat analysts' earnings expectations for 1Q2010 with a $12 million, or $0.03 per share, loss for the quarter--consensus was a $0.22 per share loss. CEO Richard Dugas said the company's performance reflected "tremendous gains" despite "modest revenues and closing volumes." In fact, the earnings improvement pushed him to tell analysts that, barring any substantial change in the market, the company would be profitable on a full-year basis for 2010.
Helping to inch the company closer to the break-even mark were fewer impairments, a more efficient overhead structure--Dugas said management was not effectively "running two businesses essentially on one overhead structure"--and better margins. Moreover, on a go-forward basis, Dugas said not only would the company benefit from additional savings and efficiencies on the construction and purchasing sides of the business but that there was more "consistency and visibility" in the backlog--both of which would contribute to continued performance.
However, despite both the company's significant year-over-year and sequential gross margin improvement, analysts were quick to point out that at 13%, the company's margins still lagged those of its peers, many of whom have seen their margins skyrocket as they've restocked their lot pipelines with lower-priced land.
PulteGroup management responded by saying that unlike many of its peers, the company's need to access new land to open new communities could hardly be classified as urgent; with the Centex merger, the company acquired 55,000 new lots. With a very long lot pipeline already under control at a land basis Dugas said was "appropriately valued for the long term," management said there was less urgency to be aggressive in the short term to tie up below-market-priced lots.
"Our forecast for margin growth is sustainable and driven by things we can control," Dugas said, stressing that today's low land prices were only a temporary market phenomenon. "We don't need a lot of land to expand margins."
However, that wasn't to say that the company wouldn't be making any strategic land plays all the same. If there was an opportunity to acquire desirable lots for less than the cost to develop them, management said it would look to make the strategic acquisition. However, the company's near-term business plan wasn't hinging on finding those kinds of deals, explained Dugas. "We can afford to be choosy," he said.
COO Steve Petruska added that management also would pursue more lot development in the year ahead, although it would aim to be more efficient and conservative in doing so, focusing on developing "smaller pods of lots and not getting too much land out in front of us."
With limited acquisition activity planned and a more conservative development strategy in place, analysts were curious to find out from management what it planned to do with the company's $2.6 billion in cash on its balance sheet. Without a pressing need to buy land, there was some question over whether the company would pay down debt or execute something like a share repurchase.
Dugas responded by saying that management intends to maintain a high level of liquidity; after all, fewer than 12 months ago, there was a severe liquidity crisis in the market, he reminded analysts on the call. But with that said, he added that management was evaluating a number of alternatives for its cash. "We're not going to just let it sit there," he said.