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PulteGroup’s Gross Margins Shrink to 22.7% in 1Q15

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PulteGroup’s gross margins – from the bottom to the top quartile of the industry

PulteGroup’s (PHM) gross margins for the quarter came in at 22.7%, down 110 basis points on a year-over-year basis and down 40 basis points from the fourth quarter. Pulte has doubled its gross margins since 2010 when it began its value creation initiatives to turn the company around.

Like most builders, PulteGroup was able to increase prices while controlling costs for most of 2014. It seems like prices have gone up about as far as they can, however. The company’s average selling prices increased 2% in the first quarter, to $323,000.

Historically, real estate prices have correlated tightly with wage growth. We probably have seen the end of the bounce off the bottom, and further increases will be driven by wages.

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“Although Q1 earnings were impacted by higher income tax expense, acquisition accounting and construction delays which slowed closings, we generated a 6% increase in unit signups while maintaining high absorption paces and low incentive levels,” said Richard J. Dugas, Jr., president and chief executive officer of PulteGroup. He added, “Given the favorable demand environment and ongoing benefits from our Value Creation initiatives, we are well positioned to deliver another year of excellent operating and financial results.”

Margins have probably peaked for the industry

The homebuilding sector, as measured by the SPDR S&P Homebuilder ETF (XHB) has probably seen its peak margins for a while. Over the past few years, the luxury sector has been booming, helping builders such as Toll Brothers (TOL). D.R. Horton (DHI) recently launched a luxury brand, Emerald Homes, and is seeing strong growth there as well.

Toll is in the McMansion business, and those homes have high margins. Now builders are targeting starter homes for Millennials. PulteGroup and D.R. Horton are well positioned here. Finally, the West Coast–centric builders such as KB Home (KBH) and Standard Pacific Homes (SPF) seem to have hit the point where buyers are balking at higher prices.

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