Morningstar | PulteGroup Reports Solid 2Q Results, but New Order Growth Disappoints; Maintaining $33 FVE
While PulteGroup reported good second-quarter results driven by a 25% year-over-year increase in homebuilding revenue and improved homebuilding profitability, the firm's new order volume, a leading indicator of demand, declined about 1% year over year. In addition, PulteGroup's order cancellation rate increased 100 basis points year over year to 14%. PulteGroup's new order activity appeared especially disappointing compared with competitor D.R. Horton, which also released earnings on July 26 and reported a 12% year-over-year increase in new orders. Unlike competing homebuilder NVR, PulteGroup's decline in new orders can't be attributed to fewer communities than the year-ago quarter; PulteGroup operated out of 847 communities during the second quarter of 2018 versus 803 communities during the year-ago quarter. Instead, PulteGroup attributed the 6% year-over-year decline in absorption pace (2.5 new orders per community per month versus 2.7 in the year-ago quarter) to the firm's focus on price over pace. We think it's way too early to throw the towel in on PulteGroup's growth potential, and we still think the firm is well-positioned to achieve double-digit top-line growth over the next couple of years. As such, we've maintained our $33 per share fair value estimate.Despite weak order activity, PulteGroup's backlog value of $5.2 billion is 17% higher than the year-ago quarter, as backlog units are up 11% and backlog price is up 5%. As such, PulteGroup is positioned to deliver solid growth over the back half of 2018 and into 2019.
PulteGroup's focus on price over pace was evident in the firm's adjusted home sale gross margin, which expanded 60 basis points year over year to 24%. Gross margin expansion, coupled with strong selling, general, and administrative expense leverage led to a 180-basis-point expansion in home sale operating margin, from 11.4% to 13.2%.
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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