Considering the dire outlook that PulteGroup's (NYSE:PHM) management gave at the end of the fourth quarter, the company's most recent earnings results were a pleasant surprise. Even though sales on a unit and dollar basis were mostly flat and its net income was down slightly, those comparisons were coming from an incredibly strong first quarter in 2018.
What's also encouraging is that management seems to have changed its tune now that interest rates are on the decline again. So let's look at the company's most recent earnings results and see what could be in store for the rest of the year.
By the numbers
|Metric||Q1 2019||Q4 2018||Q1 2018|
|Revenue||$2.0 billion||$2.99 billion||$1.97 billion|
|Net income||$166.8 million||$237.6 million||$170.7 million|
Considering the great first quarter this time last year and the fear of rising interest rates at the beginning of the quarter, these results are pretty good. Overall, total closings were more or less flat compared with this time last year, and average sales prices ticked up slightly to $421,000.
Those numbers are largely attributed to strong performance in Florida and Texas, as these were the only two segments to grow compared with the prior year. Absent these two states, PulteGroup saw significant declines across the board.
One thing that was a bit discouraging in these results was that net new orders were down 6% from this time last year. As management noted, though, traffic to its communities were up 12% from this time last year. What that probably means is that there's a lot of customer interest in buying a home today, but there's probably a hurdle or two in the way of making a purchase. Whether that be higher sales prices, interest rates, or a combination of the two, it seems as though the opportunity to grow is still there.
PulteGroup also helped its cause with investors by repurchasing $25 million in stock in the quarter. Over the past five years, the company has reduced total shares outstanding by 26%. With more than $1 billion in cash on the balance sheet and a net debt-to-capital ratio of 28%, the company should be able to do some significant share repurchases this year.
What management had to say
In the prior quarter, CEO Ryan Marshall described rising interest rates as the final straw among a myriad of factors that was led to slowing demand for new homes. He made those comments when interest rates were closer to 5% and there were concerns that interest rates were going to head higher from there.
Recently, though, the Federal Reserve's decision to pause any further interest rate increases for 2019, for the time being, has led to a mortgage rate reprieve. Now, we're looking at interest rates closer to 4% than 5%. As a result, Marshall noted that customer demand is picking back up to their high 2018 levels:
We are experiencing a very typical seasonal upswing, and are generally encouraged by the level of buyer activity that we're seeing. Further, with the strong economic backdrop and the recent decline in mortgage rates, there's every reason to believe that 2019 can be another good year for the housing industry.
Overall, our first quarter results are consistent with an improving demand environment. Reflective of the typical spring selling season, traffic increased on a sequential basis throughout the quarter, with more consumers visiting our communities each month as the quarter progressed. More importantly, traffic into our communities was also up each month over the same month last year, both in absolute numbers and on a per community basis, when adjusted for our higher community count.
Absorption pace has also improved during the quarter, although they remain below last year's level. With that said, it is worth noting that we experienced a very strong start to 2018, so the year-over-year comps are more challenging for the first half of this year.
You can read a full transcript of PulteGroup's conference call.
The market's looking better, but maybe it's not the best time to buy
Of its peers, PulteGroup's results are going to be especially sensitive to mortgage rates, because its average selling price is notably higher. Its portfolio is geared more toward the move-up and active adult markets than the first-time-buyer market that many of its peers want to target today. That isn't necessarily a bad strategy, as there are opportunities in all housing markets, but investors should be aware of PulteGroup's position in the market relative to its peers.
Management's approach in the prior quarter was one that appeared to be bracing for a much larger market decline than what we actually saw. Even though it did buy back stock, it was a relatively small amount considering its cash pile and modest debt levels. With the housing market progressing in fits and starts, however, it's probably a good idea to remain conservative.
Even though shares are seemingly cheap at eight times earnings, investors should keep in mind that homebuilders consistently trade at a steep discount to the broader market. So unless we see some encouraging numbers from the housing market over the next few months, it's hard to get excited about this stock.