PulteGroup Inc.’s (PHM) first-quarter 2014 adjusted earnings of 19 cents per share lagged the Zacks Consensus Estimate and the year-ago figure of 21 cents per share by 9.5%. We believe that the earnings miss was due to a weak top line and higher-than-expected tax expenses.
PulteGroup reported total revenue of $1.12 billion in the quarter, up 3.5% year over year. Total revenue however lagged the Zacks Consensus Estimate of $1.22 billion by 8.2%.
Quarter in Detail
The company conducts its operations through two primary business segments — Homebuilding and Financial Services. Pulte’s Homebuilding revenues declined 3.5% to $1.09 billion due to order shortfall and lower number of homes delivered. Home sales decreased 0.9% to $1.09 billion while land sales declined 77.1% to $6.0 million in the quarter.
Home closings declined 10.4% year over year to 3,436 homes in the reported quarter as the company witnessed weak home closing numbers in all the regions excluding Northeast. However, average selling prices (ASP) of homes delivered stood at $317,000, up 10.5% year over year, attributable to a change in mix toward steeply-priced/higher margin move-up and active-adult homes.
The company’s backlog, which represents orders yet to be closed, stood at 7,199 homes, down 8% year over year. Potential housing revenues from backlog remained flat year over year at $2.4 billion in the quarter.
Net Order Down Once Again
New home orders were down 6.0% year over year to 4,863 homes in the quarter due to lower community count and higher home prices. In fact, except Florida and Texas, all the regions witnessed a decline in net new orders. We note that other homebuilders, NVR, Inc. (NVR) and Meritage Homes Corp. (MTH) also witnessed a decline in orders in the first quarter of 2014. The value of new orders increased 2.0% year over year to $1.6 billion in the quarter due to higher absorption per community.
Pulte’s community count declined 10% to 584 communities in the first quarter of 2014. Pulte’s net orders were weak due to a decline in the number of communities as the company has been intentionally slowing down sales in some markets due to the lack of land development and scarcity of finished lots. The company is focusing more on driving price and margin rather than pushing up unit volumes, which, we believe, has been affecting net order growth.
Adjusted gross margin increased 580 basis points (bps) year over year and 60 bps sequentially to 23.8% of home sales. It was driven by improved pricing and better mix of sales (particularly of higher margin move-up homes and commonly managed plans).
However, selling, general and administrative expenses rose 150 bps to 13.3% of homebuilding revenues.
Revenues from the Financial Services segment declined 32.5% to $24.9 million due to an extremely competitive landscape for mortgage originations resulting from higher interest rates. The segment recorded pre-tax income of $22 million in the quarter, higher than prior-year earnings of $14 million.
Pulte had cash and cash equivalents and restricted cash of $1.3 billion as of Mar 31, 2014 compared with $1.7 billion as of Dec 31, 2013.
During the quarter, Pulte repurchased 2.2 million of common shares at a cost of $45 million. The company also redeemed $246 million of senior notes during the quarter.
PulteGroup carries a Zacks Rank #2 (Buy).
A better-ranked stock in the homebuilding sector that deserves a mention is William Lyon Homes (WLH) with a Zacks Rank #1 (Strong Buy).