Another quarter of favorable market conditions for homebuilders is in the books, and PulteGroup (NYSE:PHM) took full advantage of the situation to post better than expected quarterly earnings, even though revenue came in slightly lower than expected.
Here's a look at the company's most recent results and why investors can reasonably assume that things will likely improve from here.
By the numbers
|Metric||Q3 2017||Q2 2017||Q3 2016|
|Revenue||$2.13 billion||$2.02 billion||$1.94 billion|
|Net income||$177 million||$101 million||$128 million|
Like in the prior quarter, PulteGroup delivered on just about every metric you want to see from homebuilders. Revenue was up, driven by a modest 2.2% uptick in closings and a 6.6% increase in the average selling price per house, which stood at $399,000 for the third quarter. Analysts were expecting somewhat higher revenue for the quarter, but what do they know?
If you wanted to get really nitpicky, the company's costs grew slightly faster than revenue in the quarter as homebuilding costs increased a bit. Selling, general, and administrative costs climbed a bit compared to the prior quarter -- 11.6% of revenue -- but were still below management's target range of 12% to 12.5%.
While another quarter of increased revenue is satisfying to see, it's even more encouraging to see that new orders and backlog continue to outpace revenue and closings. PulteGroup's third-quarter net new orders grew 11% to 5,300 units compared to 4,775 this time last year. This gave the company a total unit backlog of 10,823 homes with an average selling price of $431,000 in the backlog. That's the highest backlog price the company has reported in 10 years.
With all of those new orders, the company continues to build inventories and working capital, which, of course, eats into cash from operations. As a result, the company had to tap some of the cash on the balance sheet to pay dividends and buy back shares. Management intends to buy back $1.5 billion in stock between Q3 2016 and the end of this fiscal year. This past quarter, it repurchased another $260 million, and it puts the total since Q3 2016 at $918 million. While it is possible for the company to meet its stated goal, it will need to have a significant drawdown in working capital from new unit sales to do so with cash from operations.
What management had to say
Even with PulteGroup's backlog hitting 10-year highs, CEO Ryan Marshall seems to think the company and the housing market in general still have a lot of room to run:
Despite the disruptions caused by Hurricanes Harvey and Irma, our 11% increase in year-over-year orders for the quarter points to the health of the market, while the 15% increase in our backlog puts us in an excellent position to deliver strong fourth quarter and full-year financial results.
Fueled by growing demand among first-time buyers and supported by a strong economy, high employment, and historically low interest rates, U.S. new home sales for 2017 are expected to grow a healthy 5% to 10% over last year. We remain optimistic about the strength of future housing demand, as the current housing cycle moves into its seventh year of growth.
What a Fool believes
This has been a long run of growth for the housing market, but all of the macro trends Marshall mentioned in his prepared remarks are working in housing's favor right now. On top of that, the supply of houses is much lower than average as Baby Boomers swell the ranks of retired people and stay in their existing homes. This makes Pulte's and other homebuilder's assets that much more expensive and will likely lead to several more years of housing growth.