“The miss was primarily a factor of lower backlog conversion, as third quarter 2015 deliveries came in 17% below our estimates [~$300 million in revenue],” wrote Raymond James in a research note. “Interestingly, no comments were included in the press release about what led to the miss in backlog conversion, but we suspect the tight labor market likely played a factor. The lower conversion drove most of the other model variances, as Pulte was unable to derive sufficient operational leverage from the lower revenue.”
UBS’s Susan Maklari also pointed to construction delays as an anchor for the Atlanta-based builder during the quarter (in addition, one-time charges from litigation-related reserve adjustments hurt the company in the quarter). “We believe trends seen this quarter in revenues and backlog reflects the near-term constraints we've been hearing of in our channel checks, including construction delays related to weather in certain parts of the country earlier in the year as well as on-going, broader labor constraints. In turn, we look for these to reverse over time,” she wrote.
But there were a lot of positive signs as well. Gross margins jumped 30 basis points sequentially and 70 basis points year-over-year to 23.6%, which beat estimates. It represents another good quarter for margins. “Positively, Pulte's apples-to-apples core gross margin remains near the top of the industry,” Raymond James wrote.
“This [order growth], in turn, drove absorptions 6% year over year on a 2% rise in community count,” Maklari wrote. “Given the order growth this quarter, the unit backlog rose 10% year over year and represents five months of forward visibility based on our estimates.”
Overall, Maklari still likes the Atlanta-based builder going forward. “Despite the weaker results this quarter, we continue to believe Pulte is among the best positioned names for the recovery and remains among our top picks as we believe it offers an attractive reward versus risk trade-off compared to others in the group,” she says.