Morningstar | PulteGroup's 1Q Sales and Profits Top Management's Guidance; Customer Traffic Trends Are Encouraging
PulteGroup's stock closed the April 23 trading day up almost 4% after the no-moat homebuilder reported first-quarter results that beat management's expectations. Management had expected to deliver 4,300 to 4,600 homes at an average selling price of $420,000 but ended up delivering 4,635 homes (slightly higher than last year) with an ASP of $421,000 (up 1.8% year over year), which translated into a 2% increase in home sale revenue. Home sale gross margin of 23.4% beat management's guidance of 22% to 22.5%, as did the firm's selling, general, and administrative expense ratio, which came in 50 basis points better than management had projected.CEO Ryan Marshall said he's encouraged by the level of buyer activity and noted that customer traffic has been up relative to last year. Still, increased customer interest didn't translate into new order growth during the quarter. Indeed, on a per community basis, PulteGroup signed 7.5% fewer orders per community during the quarter (7.5 orders per community versus 8.1 last year). If the housing market strengthens over the rest of 2019, PulteGroup could report meaningful order growth due in part to easier prior-year comparisons.
While management acknowledged that the pricing environment has been more challenging relative to last year, the ASP of PulteGroup's deliveries and new orders were up 1.8% and 0.6%, respectively, which tells us that management is not getting overly aggressive with incentives and is carefully managing pace versus price to maximize margins and returns. Management noted that sales discounts were up 80 basis points year over year, but the company managed to offset much of these discounts with higher lot premiums and option revenue.
Given that Lennar disclosed full-year guidance, we were somewhat expecting PulteGroup to do the same, but that won't come until next quarter. After reviewing PulteGroup's first-quarter results, we don't expect to materially change our $33 per share fair value estimate.
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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