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PulteGroup (PHM) Q2 Earnings Shine: Time to Invest or Wait?
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Atlanta, GA-based homebuilder PulteGroup, Inc. (PHM - Free Report) recently reported robust second-quarter 2024 results, showcasing the resilience of housing demand and the company's sustainable improvements in capital efficiency despite a challenging interest rate environment.
The company exceeded earnings and revenue expectations, driven by a balanced operating model. This model facilitated an increase in average sales price (ASP), closings, and gross margin expansion, collectively boosting earnings by 19%.
Investors reacted positively to the strong earnings report, with PulteGroup's stock rising 6% since the release, outpacing the Zacks Building Products - Home Builders industry’s 3.6% gain. Year to date, PHM shares have rallied 16.3%, outperforming the industry, sector, and S&P 500’s gains of 15.5%, 11%, and 10%, respectively.
Image Source: Zacks Investment Research
PHM shares have also outperformed a few prominent industry players like D.R. Horton, Inc. (DHI - Free Report) and Lennar Corporation (LEN - Free Report) , each rising 11.3% and 11.9% so far this year. Yet, NVR, Inc. (NVR - Free Report) managed to gain 18.7%, performing a little better than PHM during the same time frame.
Is now the right time to invest, given the solid earnings performance? Let's explore PulteGroup's investment potential following its latest earnings release.
Second-Quarter Highlights
Despite a challenging demand environment and fluctuating consumer confidence in the second quarter, PulteGroup impressively achieved a 9.6% year-over-year increase in home sale revenues, totaling $4.45 billion. This success was primarily driven by an 8% rise in the number of homes closed, reaching 8,097 units, and a 2% increase in the ASP of homes delivered.
The company reported an impressive homebuilding gross margin of 29.9%, representing a 30 basis point (bps) improvement over both the previous year and the first quarter of 2024. This enhancement in gross margin was bolstered by a favorable geographic mix, strategic pricing dynamics, and a sequential reduction in incentives. Furthermore, PHM benefited from improved construction cycle times, optimized production efficiency, and lower lumber prices, maintaining gross margins significantly above pre-pandemic levels.
These positive factors contributed to an exceptional 19% increase in earnings per share (EPS), setting a second-quarter record of $3.83 per share. This robust financial performance is highlighted by not only double-digit earnings growth but also a return on equity of 27.1% over the trailing 12-month period. PHM’s results underscore the resilience of housing demand and the company's sustainable improvements in capital efficiency.
While mortgage rates pose a continued challenge for the industry, PulteGroup continues to excel due to its cyclically resilient operating model, effective pricing strategy, and mortgage rate buydown program.
A Look at a Few Hiccups
Since the first quarter of 2024 conference call in April, management has noted that demand has been inconsistent, with particular weakness in Florida and Texas due to rising inventories of existing homes for sale. As a result, due to a higher proportion of West Coast sales, PulteGroup maintained its third-quarter gross margin guidance at 29% (a 30 basis point decrease year over year) and lowered its fourth-quarter gross margin outlook to 28.5%-29% (down from the previously expected 29%- and 28.7% a year ago).
Due to higher rates and other market dynamics, PHM’s second-quarter net new orders were 7,649, down 4% from last year's strong results. Last year’s second-quarter orders were boosted by Del Webb’s grand opening and built-for-rent sales, which are inherently variable.
Orders in Florida dropped 9% from the previous year, while Texas saw an 8% decline, largely due to increased inventory from lower demand. PHM indicated that prices might need to decrease for the excess inventory to be absorbed and that they may offer more incentives to move inventory in these markets. Notably, Florida and Texas accounted for 46% of 2023 closings.
Despite the challenges in Florida and Texas and fluctuating consumer confidence, July traffic was strong. Therefore, the company’s second-half 2024 gross margin assumptions may prove conservative.
What’s Next for Investors?
To support investors in making sound decisions about PHM, it's important to analyze the relevant factors affecting their investment rather than depending on the performance of a single quarter.
PulteGroup is emerging through the ongoing housing market volatility by facilitating various strategic initiatives, including a balanced operating model, offering an appealing mortgage rate buydown program and a favorable pricing structure. The company engages in maintaining a 50/50 balance between build-to-order and spec sales, enabling it to meet immediate demand with spec homes while also accommodating buyers who prefer to customize their homes with build-to-order options.
At the start of the second quarter, PHM had around 8,100 homes under construction. By the end of the quarter, this number grew to 17,250, with approximately 6,900 of these being speculative homes, which represents 40%. On average, this equates to 1.3 finished speculative homes per community. These figures align with its targets of 40% spec homes and one finished spec per community, positioning the company well to meet delivery goals for the rest of the year. It remains ready to adjust the pace of new spec starts based on sustained shifts in overall demand.
Also, in times of higher interest rates, having spec homes allows PulteGroup to offer powerful incentives, such as forward mortgage rate commitments. These incentives can be more effectively applied to spec inventory, making it more attractive to buyers who are concerned about rising interest rates.
Overall, PulteGroup reiterated the outlook of 5% to 10% longer-term annual growth for the business. Low housing inventory, a desire for homeownership and favorable demographic trends are expected to drive growth in the homebuilding market despite challenges.
For PHM, the Zacks Consensus Estimate has moved north over the past 30 days as analysts increased their estimates, depicting optimism over the stock’s growth potential. Over the said time frame, the Zacks Consensus Estimate for 2024 EPS has increased to $13.28 from $12.85. The same for 2025 has increased to $13.54 from $13.38 over the past 30 days. This bullish trend justifies the stock’s addition to investors’ portfolios. The company’s long-term (three-to-five-years) earnings growth rate is an impressive 19%, higher than its industry’s 13%, highlighting its inherent strength.
EPS Movement Chart
Image Source: Zacks Investment Research
From a valuation perspective, the company’s shares currently trade at levels higher than its five-year median but below the industry average, going by the forward 12-month price/earnings ratio.
Image Source: Zacks Investment Research
Final Thoughts
The interest rate outlook continues to be unpredictable, and customer traffic may be inconsistent until mortgage rates stabilize. However, PHM is well-equipped with the right selling tools, a strong balance sheet, and strategic land holdings to keep gaining market share regardless of the rate environment.
PulteGroup’s trailing 12-month ROE is indicative of its growth potential. ROE for the trailing 12 months is 25.7%, much higher than the industry’s 18.3%, reflecting the company’s efficient usage of shareholders’ funds.
PulteGroup also has been paying quarterly dividends for nearly four decades. It has been consistently focusing on sharing its cash flows with shareholders and maintaining a solid financial position. In November 2023, it announced a quarterly dividend hike of 5% to 20 cents per share. This was paid on Jan 3, 2024, to shareholders of record at the close of business on Dec 19, 2023. We believe that PHM will achieve significant cash flow benefits this year by reducing construction cycle times from the current 123 days to a targeted 100 days or below.
The stock’s Zacks Rank #2 (Buy) suggests a potential upside given its strong operating model, effective incentive packages, and sound pricing strategy. We expect PHM to generate substantial returns and another $2 billion in operating cash flow in 2024. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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PulteGroup (PHM) Q2 Earnings Shine: Time to Invest or Wait?
Atlanta, GA-based homebuilder PulteGroup, Inc. (PHM - Free Report) recently reported robust second-quarter 2024 results, showcasing the resilience of housing demand and the company's sustainable improvements in capital efficiency despite a challenging interest rate environment.
The company exceeded earnings and revenue expectations, driven by a balanced operating model. This model facilitated an increase in average sales price (ASP), closings, and gross margin expansion, collectively boosting earnings by 19%.
Investors reacted positively to the strong earnings report, with PulteGroup's stock rising 6% since the release, outpacing the Zacks Building Products - Home Builders industry’s 3.6% gain. Year to date, PHM shares have rallied 16.3%, outperforming the industry, sector, and S&P 500’s gains of 15.5%, 11%, and 10%, respectively.
Image Source: Zacks Investment Research
PHM shares have also outperformed a few prominent industry players like D.R. Horton, Inc. (DHI - Free Report) and Lennar Corporation (LEN - Free Report) , each rising 11.3% and 11.9% so far this year. Yet, NVR, Inc. (NVR - Free Report) managed to gain 18.7%, performing a little better than PHM during the same time frame.
Is now the right time to invest, given the solid earnings performance? Let's explore PulteGroup's investment potential following its latest earnings release.
Second-Quarter Highlights
Despite a challenging demand environment and fluctuating consumer confidence in the second quarter, PulteGroup impressively achieved a 9.6% year-over-year increase in home sale revenues, totaling $4.45 billion. This success was primarily driven by an 8% rise in the number of homes closed, reaching 8,097 units, and a 2% increase in the ASP of homes delivered.
The company reported an impressive homebuilding gross margin of 29.9%, representing a 30 basis point (bps) improvement over both the previous year and the first quarter of 2024. This enhancement in gross margin was bolstered by a favorable geographic mix, strategic pricing dynamics, and a sequential reduction in incentives. Furthermore, PHM benefited from improved construction cycle times, optimized production efficiency, and lower lumber prices, maintaining gross margins significantly above pre-pandemic levels.
These positive factors contributed to an exceptional 19% increase in earnings per share (EPS), setting a second-quarter record of $3.83 per share. This robust financial performance is highlighted by not only double-digit earnings growth but also a return on equity of 27.1% over the trailing 12-month period. PHM’s results underscore the resilience of housing demand and the company's sustainable improvements in capital efficiency.
While mortgage rates pose a continued challenge for the industry, PulteGroup continues to excel due to its cyclically resilient operating model, effective pricing strategy, and mortgage rate buydown program.
A Look at a Few Hiccups
Since the first quarter of 2024 conference call in April, management has noted that demand has been inconsistent, with particular weakness in Florida and Texas due to rising inventories of existing homes for sale. As a result, due to a higher proportion of West Coast sales, PulteGroup maintained its third-quarter gross margin guidance at 29% (a 30 basis point decrease year over year) and lowered its fourth-quarter gross margin outlook to 28.5%-29% (down from the previously expected 29%- and 28.7% a year ago).
Due to higher rates and other market dynamics, PHM’s second-quarter net new orders were 7,649, down 4% from last year's strong results. Last year’s second-quarter orders were boosted by Del Webb’s grand opening and built-for-rent sales, which are inherently variable.
Orders in Florida dropped 9% from the previous year, while Texas saw an 8% decline, largely due to increased inventory from lower demand. PHM indicated that prices might need to decrease for the excess inventory to be absorbed and that they may offer more incentives to move inventory in these markets. Notably, Florida and Texas accounted for 46% of 2023 closings.
Despite the challenges in Florida and Texas and fluctuating consumer confidence, July traffic was strong. Therefore, the company’s second-half 2024 gross margin assumptions may prove conservative.
What’s Next for Investors?
To support investors in making sound decisions about PHM, it's important to analyze the relevant factors affecting their investment rather than depending on the performance of a single quarter.
PulteGroup is emerging through the ongoing housing market volatility by facilitating various strategic initiatives, including a balanced operating model, offering an appealing mortgage rate buydown program and a favorable pricing structure. The company engages in maintaining a 50/50 balance between build-to-order and spec sales, enabling it to meet immediate demand with spec homes while also accommodating buyers who prefer to customize their homes with build-to-order options.
At the start of the second quarter, PHM had around 8,100 homes under construction. By the end of the quarter, this number grew to 17,250, with approximately 6,900 of these being speculative homes, which represents 40%. On average, this equates to 1.3 finished speculative homes per community. These figures align with its targets of 40% spec homes and one finished spec per community, positioning the company well to meet delivery goals for the rest of the year. It remains ready to adjust the pace of new spec starts based on sustained shifts in overall demand.
Also, in times of higher interest rates, having spec homes allows PulteGroup to offer powerful incentives, such as forward mortgage rate commitments. These incentives can be more effectively applied to spec inventory, making it more attractive to buyers who are concerned about rising interest rates.
Overall, PulteGroup reiterated the outlook of 5% to 10% longer-term annual growth for the business. Low housing inventory, a desire for homeownership and favorable demographic trends are expected to drive growth in the homebuilding market despite challenges.
For PHM, the Zacks Consensus Estimate has moved north over the past 30 days as analysts increased their estimates, depicting optimism over the stock’s growth potential. Over the said time frame, the Zacks Consensus Estimate for 2024 EPS has increased to $13.28 from $12.85. The same for 2025 has increased to $13.54 from $13.38 over the past 30 days. This bullish trend justifies the stock’s addition to investors’ portfolios. The company’s long-term (three-to-five-years) earnings growth rate is an impressive 19%, higher than its industry’s 13%, highlighting its inherent strength.
EPS Movement Chart
Image Source: Zacks Investment Research
From a valuation perspective, the company’s shares currently trade at levels higher than its five-year median but below the industry average, going by the forward 12-month price/earnings ratio.
Image Source: Zacks Investment Research
Final Thoughts
The interest rate outlook continues to be unpredictable, and customer traffic may be inconsistent until mortgage rates stabilize. However, PHM is well-equipped with the right selling tools, a strong balance sheet, and strategic land holdings to keep gaining market share regardless of the rate environment.
PulteGroup’s trailing 12-month ROE is indicative of its growth potential. ROE for the trailing 12 months is 25.7%, much higher than the industry’s 18.3%, reflecting the company’s efficient usage of shareholders’ funds.
PulteGroup also has been paying quarterly dividends for nearly four decades. It has been consistently focusing on sharing its cash flows with shareholders and maintaining a solid financial position. In November 2023, it announced a quarterly dividend hike of 5% to 20 cents per share. This was paid on Jan 3, 2024, to shareholders of record at the close of business on Dec 19, 2023. We believe that PHM will achieve significant cash flow benefits this year by reducing construction cycle times from the current 123 days to a targeted 100 days or below.
The stock’s Zacks Rank #2 (Buy) suggests a potential upside given its strong operating model, effective incentive packages, and sound pricing strategy. We expect PHM to generate substantial returns and another $2 billion in operating cash flow in 2024. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.