Morningstar | After a Great 2018, PulteGroup Prepares for an Uncertain Spring Selling Season. See Updated Analyst Note from 30 Jan 2019
PulteGroup reported strong fourth-quarter results to close out an impressive 2018 campaign, which featured a 19% year-over-year increase in homebuilding revenue. However, the no-moat rated homebuilder's uncertain outlook heading into the all-important spring selling season casts doubt on its ability to build upon its 2018 momentum.Fourth-quarter revenue from home sales increased 6% year over year to $2.9 billion due to a 1% increase in volume and a 5% increase in average selling price. The firm's adjusted home sales gross margin of 23.8% was flat relative to the prior-year quarter, and adjusted homebuilding operating margin improved 10 basis points to 13.9%.
New orders, a key leading indicator, declined 11% during the quarter due to softening demand for new homes. However, like other homebuilders that have reported fourth-quarter earnings, PulteGroup saw improving customer traffic as the quarter progressed. Given the fact that the 30-year average fixed rate mortgage has fallen to 4.45% (from a cycle high of 4.94%), which is about in line with prevailing mortgage rates during last year's spring selling season when demand for new homes was strong, we think this spring selling season could surprise to the upside, which PulteGroup is well positioned to accommodate.
We've been impressed with PulteGroup's improving inventory efficiency metrics, which have been driven by the firm's strategy to purchase shorter duration owned land and increase its use of land options. PulteGroup now owns less than four years of land and optioned land represents 40% of its land position. We've become more confident in PulteGroup's ability to sustainably operate a lighter land strategy, however, the favorable valuation effect of our increased confidence (modeled as a lower inventory as a percentage of sales ratio) was offset by our tempered near-term growth expectations. Still, our fair value estimate has increased about 3% to $33, due to the time value of money since our last update.
PulteGroup generated over $1.4 billion of operating cash flow in 2018 (versus $663 million in 2017) and finished the year with $1.1 billion of cash on the balance sheet. Management noted that it expects to spend $1.2 billion on land acquisitions in 2019, which is commensurate with the amount spent in 2018. During the earnings call, CEO Ryan Marshall noted that the firm remains "constructive on the market." The fact that PulteGroup isn't planning on pulling back its land spend in 2019 aligns with that viewpoint, in our opinion.
PulteGroup through its subsidiaries is engaged in the homebuilding business. The company also has mortgage banking operations, conducted principally through its susidiary, Pulte Mortgage LLC, and title and insurance brokerage operations. The company's homebuilding business includes the acquisition and development of land primarily for residential purposes within the United States. The company provides a variety of home designs, including single-family detached, townhouses, condominiums, and duplexes at different prices and with varying levels of options and amenities to its customer groups: first-time, move-up, and active adult.
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