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Pulte’s gross margins have doubled since 2010, with room to grow

Brent Nyitray, CFA, MBA

Key points from PulteGroup's 4Q and full-year 2013 earnings report (Part 3 of 5)

(Continued from Part 2)

Pulte’s gross margins have gone from the bottom quartile of the industry to the top quartile

Pulte’s gross margins for the quarter came in at 23.2%, which was an increase of 610 basis points over the prior year and 230 basis points over the third quarter. This was the 12th consecutive quarter of gross margin expansion, and Pulte has doubled gross margins since 2010, when it began its Value Creation Initiatives to turn the company around.

Like most builders, PulteGroup’s increase in gross margins is driven by increases in average selling prices while input costs remain under control. The company’s average selling prices increased 13% in the fourth quarter, to $325,000. The increase in average selling prices was due to general price hikes combined with a mix towards the move-up buyer versus the first-time homebuyer.

Richard Dugan, chairman and chief executive officer, characterized the quarter this way (emphasis mine):

  • “Our fourth quarter results complete an outstanding year during which we realized dramatic operating and financial improvement as we continue to benefit from our Value Creation Initiatives and from the ongoing recovery in U.S. housing. Our 23.2% gross margin, which represents a 610 basis point improvement over last year, is the highest margin we have achieved since 2005.”

More room for expansion

During the call, the company was asked if this was a high water mark or whether there was still room for expansion. The company expects 2014 gross margins to be higher than 2013 gross margins. The bigger question is whether they can improve on their 23.2% fourth quarter margins. Without committing to it, the company said it believes there’s still room to grow its gross margins.

The issue for the builders will be whether they can continue to raise prices the way they have over the past year. Most observers believe that the torrid price increases of the past couple of years are unlikely to be matched going forward. Input prices may not stay the same either—especially if the builders begin to increase output, which will increase demand.

For more analysis on the homebuilder industry outlook, see D.R. Horton and other homebuilders’ outlook for 2014 and beyond.

Continue to Part 4

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