Why PulteGroup got smacked on negative order growth
PulteGroup is the largest U.S. homebuilder by revenue
PulteGroup is a Michigan-based homebuilder that was created by the merger of Pulte Homes and Centex. Pulte Homes concentrated on move-up buyers, while Centex focused on entry-level buyers. PulteGroup also has the Del Webb brand, which focuses on active adults. PulteGroup is therefore more diversifed than most other builders. It’s also a mortgage originator, and it provided mortgages to two-thirds of its buyers. Geographically, Pulte is pretty well diversified and has exposure to every major market in the country.
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PulteGroup’s earnings per share came in at $0.26, missing expectations of $0.30. Revenues came in at $1.2 billion—an increase of 19% and below street expectations of $1.38 billion. Orders were down 12% in unit terms and 5% in dollar value. This drop shocked the Street, and the stock was down 10%. To ease the pain, it instituted a dividend and boosted its buyback. This was a bad message. Given that the secular (long-term) story for homebuilding is so strong, can’t the company find better uses of capital than share buybacks? And while margins improved, people want to see growth.
On its conference call, the company discussed the increase in mortgage rates and said that it hasn’t seen any effects on traffic and sales. Competitor D.R. Horton did admit that increased rates have affected its sales. It believes that limited supply is still the driver of the market and that homes are still very affordable by historical standards.
Read-across to the other homebuilders
Given that Pulte is so big and diversified across geography and price points, there really isn’t that much that you can glean for the remaining homebuilders. So far, we’ve had Q1 earnings from Lennar (LEN), KB Homes (KBH), Meritage (MTH), Ryland (RYL), PulteGroup (PHM), and NVR (NVR). Lennar and KB beat numbers, NVR came in as expected, and Ryland, Meritage, and PulteGroup missed. So earnings have been a mixed bag so far.
While the increase in rates may be driving decreasing orders and sales, it doesn’t affect the secular story on the builders, which is that there’s a tremendous amount of pent-up demand due to low household formation numbers for the last several years as well as low inventory. The other takeaway is that while the NAHB homebuilder sentiment survey may be at record highs, the decline in housing starts should have been a warning flag—even if it was primarily due to multi-family construction.