Morningstar | Despite Reporting Flat Order Growth, PulteGroup's Stock Soars After 3Q Earnings Release
PulteGroup reported strong third-quarter results: homebuilding revenue was up 25% year over year to $2.6 billion; homebuilding operating margin expanded 190 basis points to 14.2%; and EPS increased 74% to $1.01. Still, we were expecting the stock to trade lower on Oct. 23 as investors zeroed in on PulteGroup's second-consecutive quarter of weak new order growth as a sign of a stalling housing market. Instead, PulteGroup's stock closed the Oct. 23 trading day up over 7%, and the rest of the homebuilders we cover followed PulteGroup higher. Perhaps a solid top and bottom line beat was all that was needed to assuage concerns about the housing market for the day. However, we suspect that CEO Ryan Marshall's very candid, but still positive, outlook on the housing market and PulteGroup's prospects may have supported a more constructive view on the stock for some investors.New orders during the third quarter grew just 1% year over year following a 1% decline last quarter. A lack of communities was not to blame for the slowdown; rather, order pace was the issue as PulteGroup's community absorption pace fell to 2.1 monthly orders per community compared with 2.3 last year. Marshall told investors that traffic to PulteGroup's communities remains high, it was up 15% in the third quarter and remained strong in October. However, he noted that while interest remains high, getting prospective customers to sign contracts has become more challenging considering high home prices and rising mortgage rates. Marshall went on to highlight the factors that still support a positive outlook for housing: high buyer interest (even if they're slower to pull the trigger lately); low unemployment; wage growth; and low inventory of existing homes. We agree with Marshall's assessment.
After reviewing PulteGroup's third-quarter results and market commentary, we slightly tempered our ASP and gross margin assumptions, which caused our fair value estimate to decline about 1.5% to $32 per share.
Management noted that it expects to deliver 6,500 to 6,800 homes during the fourth quarter with an ASP of $420,000 to $430,000. This guidance equates to about flat to 7.5% year-over-year fourth-quarter home sales revenue growth.
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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