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Prudent land-acquisition strategies, diverse buyer group together with solid housing industry fundamentals bode well for PulteGroup Inc. PHM.
Not long ago, this Atlanta, GA-based homebuilder reported impressive first-quarter 2018 results, wherein both earnings and revenues surpassed the Zacks Consensus Estimate. The quarterly earnings of the company reflect a solid 111% year-over-year jump propelled by higher demand, courtesy of favorable U.S. housing market dynamics backed by an improving economy and job market. Revenues grew 21% on a rise in the number of homes delivered. Revenues from the homebuilding segment increased 21.1% and the same from the Financial Services segment was up 10%. Home closings increased across all operating regions of the company.
Shares of PulteGroup have gained 34.2% in the past year compared with its industry rally of 15%. The price performance is backed by the company’s impressive earnings history. PulteGroup surpassed earnings estimates in all the past four quarters, with an average of 10.35%.
Also, earnings estimates have moved north 5.7% for the current quarter and 6.4% for 2018 over the past 30 days, reflecting analysts’ optimism surrounding the company’s future earnings potential. For 2019 as well, estimates have moved 6% north. The company’s prudent land investments and strategic initiatives should drive the stock in the upcoming quarters.
Land Acquisition Strategy to Boost Profitability
PulteGroup’s annual land-acquisition strategies have resulted in improved volumes, revenues and profitability for quite some time now.
In 2017, the company was on track with its plan, spending $1.1 billion on land acquisition. Keeping in mind the healthy housing market fundamentals, PulteGroup expects land-acquisition spend to grow approximately 10% in 2018.
In the first quarter, the company’s land acquisition spends totaled $290 million, up 20% year over year. Of the land deals approved, approximately 30% of the lots are targeted to serve first-time buyers, with 49% serving move-up clients and 21% targeting active adults.
The company expects to realize higher returns on invested capital, given plans to moderate the rate of land spend, increase the use of land options where possible and accelerate inventory turns. PulteGroup is also maximizing the value of its land assets by selling houses at higher prices and better margins, thereby using the resulting strong cash flow to invest in the business, pay off debt and systematically return to its shareholders.
Diverse Buyer Groups Offer Immunity
PulteGroup’s homebuilding segment offers a wide variety of home designs to all major customer segments: first-time, move-up and active adult. In 2017, 45% of the company’s home closing came from move-up communities, 30% from first-time buyers and 25% from active adults. The company’s sales mix has shifted toward the move-up homebuyer in the recent years, for which demand has been stronger.
This shift was mainly due to the financial challenges faced by the first-time homebuyer, despite a broadly recovering U.S. economy, including the overhang of consumer debt, especially student loans related to higher education and a more restrictive mortgage lending environment. Nonetheless, the first-time homebuyer has historically played a major role in new housing and the trend is expected to continue to increase in the coming years.
The diverse set of consumer groups will likely shield the company against the fluctuations in demand owing to macroeconomic factors.
Additionally, overall fundamentals of the housing market remained positive through 2017 and are expected to improve further in 2018. Meanwhile, steady job and wage growth, a recovering economy, rising rentals, rapidly increasing household formation and a limited supply of inventory point toward a strong demand in 2018. Improving labor markets, falling unemployment rates and a limited home supply are supporting the continued rise in home prices, thereby boosting homebuilders’ top line.
That said, rising land, labor and lumber costs are threatening margins as they limit homebuilders’ pricing power. However, this Zacks Rank #3 (Hold) company’s home sales’ gross margin expanded 40 basis points from the year-ago quarter to 23.6% in the last reported quarter.
Stocks to Consider
Some better-ranked stocks in the industry are Century Communities, Inc. CCS, KB Home KBH and William Lyon Homes WLH, each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Century Communities is expected to witness a 38.7% rise in 2018 earnings.
KB Home’s earnings are expected to grow 48.5% this quarter.
William Lyon’s earnings are expected to grow 43.4% in 2018.
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