Why Is PulteGroup (PHM) Down 8.6% Since Last Earnings Report?
A month has gone by since the last earnings report for PulteGroup (PHM). Shares have lost about 8.6% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is PulteGroup due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
PulteGroup Q4 Earnings & Revenues Beat Estimates
PulteGroup Inc. reported fourth-quarter 2019 results, wherein earnings and revenues surpassed the respective Zacks Consensus Estimate. Higher demand owing to favorable housing dynamics, backed by lower interest rates and improved affordability, had a positive impact on PulteGroup’s performance in the quarter.
Inside the Headlines
Earnings per share came in at $1.14, beating the consensus mark of $1.08 by 5.6%. The bottom line also grew 2.7% year over year. Total revenues of $3.02 billion outpaced the consensus mark of $2.97 billion by 1.5% and increased 0.6% from the year-ago figure of $2.99 billion.
Segment Discussion
PulteGroup primarily operates through two business segments — Homebuilding and Financial Services.
Revenues from the Homebuilding segment were up 0.1% year over year to $2.95 billion. Moreover, home sale revenues of $2.93 billion improved 1.4% year over year, given higher deliveries. However, land sale revenues dropped 63.3% to $21.8 million from $59.5 million a year ago. The number of homes closed increased 2% year over year to 6,822. Home closings grew across most of the operating regions served (barring Florida, Southeast and Northeast). Average selling price (ASP) of homes delivered was $429,000, down 1% year over year.
Importantly, the company’s backlog — which represents orders yet to be closed — was 10,507, up 20.5% year over year. In addition, potential housing revenues from backlog increased 18.2% from the prior-year quarter to $4.54 billion. Moreover, new home orders increased 33% year over year to 5,691 units in the quarter. Home orders were up across all operating regions served, given increased community count and higher absorption pace. Value of new orders also grew 35% from a year ago to $2.5 billion.
Margins
Home sales gross margin was up 130 basis points (bps) year over year to 22.8% in the quarter. On an adjusted basis, the metric was down 100 bps year over year. Furthermore, adjusted operating margin contracted 90 bps to 12.8%. Adjusted homebuilding SG&A expenses — as a percentage of home sale revenues — were 10%, down 10 bps from the prior-year quarter.
Revenues from the Financial Services segment improved 26.8% year over year to $69.8 million. The segment generated pre-tax income of $34 million, up 580% from a year ago. Mortgage capture rate in the quarter was 84%, reflecting an increase from 77% in the year-ago period.
2019 Highlights
The company reported full-year EPS of $3.66, reflecting a 3.1% year-over-year increase. Revenues came in at $10.21 billion, up 0.2% year over year.
Financials
As of Dec 31, 2019, cash and cash equivalents were $1.22 billion, up from $1.11 billion at the end of 2018. At 2019-end, its debt-to-capitalization was 33.6%, down from 38.6% at 2018-end. In the reported quarter, PulteGroup repurchased 0.8 million shares for $30 million. In 2019, it repurchased 8.4 million common shares, or 3% of outstanding shares, for $274 million.
Q1 Guidance
Deliveries are expected within 5,300-5,500 homes, depicting an increase from 4,635 in the year-ago period. That said, at the midpoint, the guided range represents an increase of 17% over the first quarter of 2019. ASP is projected between $410,000 and $415,000, reflecting a decrease from $421,000 registered a year ago.
Homebuilding gross margin for the quarter is guided in the range of 23-23.3% (compared with 23.4% in the year-ago period). The company expects gross margin to improve sequentially.
2020 Guidance
The company expects double-digit increase in deliveries. Yet, average ASPs will be heading lower due to increased mix of entry level. ASP is expected between $415,000 and $420,000 (compared with $427,000 in 2019). Home closing or deliveries are expected within 25,500 — 26,250 homes, compared with 23,232 in 2019.
Homebuilding gross margin is guided in the range of 23-23.4% (compared with 22.8% in 2019). SG&A expense for the full year is expected to be 10.5-10.9% of home sale revenues.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in estimates review. The consensus estimate has shifted 10.42% due to these changes.
VGM Scores
At this time, PulteGroup has a nice Growth Score of B, however its Momentum Score is doing a bit better with an A. Following the exact same course, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been trending upward for the stock, and the magnitude of this revision looks promising. It comes with little surprise PulteGroup has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.
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