Why PulteGroup Reported Flat Revenue Growth



Flat revenue growth

PulteGroup (PHM) reported a consolidated revenue of $5.8 billion for fiscal 2014, up by a meager 2.5% over 2013. Almost flat revenue in 2014 came on the back of robust revenue growth of 16.5% in 2012 and 17.8% in 2013. Revenue from homebuilding comprised 97.8%, or $5.7 billion, of consolidated revenues in 2014. PulteGroup’s revenue growth pales in comparison to its major peers such as Lennar (LEN) and D.R. Horton (DHI), which reported growth of 31% and 28.2%, respectively, in 2014.

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Home sale revenue

Home sale revenue for 2014 rose by 4% to $5.66 billion. The moderate increase was attributed to an 8% increase in the average selling price, which was partially offset by a 3% decrease in closings. PulteGroup needs to focus on home closings to boost its revenue in the years to come. Excessive focus on average selling price may not yield expected gains, as sharp price rises may discourage buyers, which in turn will hurt home closing.

Home sales revenue grows strongly only when average selling prices and closings grow in tandem. If one falters, revenue is sure to go down. For example, in 2013, revenue grew by 19%. The increase in that year was mainly due to an 11% rise in the average selling price combined with an 8% increase in closings.

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Land sale revenue

Land sale revenues and its related gains or losses vary between periods, depending on the timing of land sales and a company’s strategic operating decisions. Thus, it will always remain a minor contributor to the total revenue. Land sales contributed $35 million in 2014 compared to $114 million in 2013.

The financial services segment is the laggard

In 2014, financial services revenue decreased 11% to $125.6 million over 2013. The cut was primarily due to lower origination volume resulting from lower home closings in homebuilding operations combined with lower revenues per loan due to increased competitiveness in the mortgage industry. The fall in financial services revenue in 2014 came on the back of a 12% decline in 2013. The intense competition and the more challenging environment is expected to continue for the foreseeable future, which will likely put stress on this segment.

Investors looking for diversification in the homebuilding sector can consider ETFs such as the SPDR S&P Homebuilders ETF (XHB) and the iShares Dow Jones US Home Construction Index Fund (ITB).


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