EUR 850.00 For Business Accounts Only

Morningstar | PulteGroup Reports 2Q Order Growth, but Full-Year Delivery Guidance Falls Short of Our Expectations

PulteGroup's stock sold off on July 23 even though the no-moat homebuilder beat second-quarter consensus sales and EPS estimates and grew new orders 7% year over year (as sign of improving demand). We suspect the sell-off was fueled by the combination of several developments, including disappointing June existing-home sales data, which was also released on July 23; PulteGroup's 2019 home delivery guidance that was likely less robust than many investors had hoped for; and management's commentary about a competitive market where, in many cases, homebuilders are still relying on an elevated level of sales incentives to improve sales pace.

But it was a solid quarter for PulteGroup, and the homebuilder's results met or exceeded management's expectations. PulteGroup's total sales declined 3% year over year to $2.5 billion but still came in slightly ahead of the consensus estimate. The homebuilder's $0.86 diluted EPS was $0.03 lower than last year's adjusted figure (which excludes land sale gains, insurance adjustments, and net tax benefits), but was $0.04 better than the consensus estimate.

The most anticipated data point (aside from full-year guidance) was new orders, and PulteGroup didn't disappoint, reporting 7% new order growth. Community count increased more than we had expected (up 3.5% year over year, to 877 communities), but even adjusted for community growth, orders per community increased over 3% to 7.7 orders per community, versus 7.5 orders last year.

However, we had been modeling 23,400 total deliveries in 2019 (1% year over year growth), but management only expects 22,300-22,800 deliveries (negative 4%- negative 1% growth). Management's 2019 delivery ASP, gross margin, and SG&A ratio guidance is commensurate with our previous expectations. We lowered our near-term growth assumptions, but the unfavorable valuation effect from that change was offset by the time value of money since our last update. As such, our $33 fair value estimate remains unchanged.

The National Association of Realtors released June existing home sales data the same day PulteGroup released its second-quarter results. An almost 2% month-over-month decline in seasonally adjusted annualized existing home sales to 5.27 million disappointed the market, which had been expecting 5.32 million existing home sales. NAR chief economist, Lawrence Yun, commented "either a strong pent-up demand will show in the upcoming months, or there is a lack of confidence that is keeping buyers from this major expenditure." We remain optimistic that the former will play out over the coming years.

During the quarter, PulteGroup acquired American West, a Las Vegas-based homebuilder. The acquisition gives PulteGroup 3,500 lots in the Las Vegas market and management expects it will contribute 600 deliveries in 2020. American West added 100 new orders from 11 communities to PulteGroup's total during the second quarter. Excluding American West orders, PulteGroup's new orders grew almost 6% and new orders per community grew over 3%.