PulteGroup (PHM 0.32%) announced fourth-quarter earnings and guidance that beat Wall Street estimates and sent the stock up 6%. At first glance, the numbers seem like nothing special. Revenue growth was unspectacular at 1.4%, driven by a 2% increase in unit growth and a drop in average selling prices. Adjusted earnings per share rose, but primarily due to a lower share count.
So why all the hoopla? Order growth.
A steep increase in orders outweighs flat growth
Pulte reported a 33% increase in orders to 5,629 units, from a depressed prior-year level of 4,267. The dollar value of new orders rose 35% to $2.5 billion. Backlog increased 20% to 10,507 units or about $4.5 billion. Finally, foot traffic was up 14%.
The fourth quarter has historically been a seasonally slow period for the real estate industry in general, as buyers tend to move based on the school year. Some builders have even noted that the seasonal slowdown builders typically see in the fourth quarter never materialized. Management noted that the strength was across all geographies and products.
The first-time homebuyer is becoming a bigger part of the business
Pulte announced an adjustment in its product mix to increase its share of starter homes. Pulte's bread and butter has historically been the move-up homebuyer, but there is such pent-up demand in the first-time-homebuyer demographic that just about everyone is allocating more resources there. Pulte's niche will be the more-expensive first-time-homebuyer properties, which fit more naturally with its core move-up buyer.
First-time homebuyers accounted for 32% of Pulte's unit volume in the fourth quarter, which is about in line with national averages. In terms of order growth, Pulte saw increases across the board; however, the first-time-homebuyer segment grew 57%, compared to a 27% increase for move-up and a 22% increase for active adults.
Can manufacturing techniques control costs and boost margins?
The company also announced an acquisition of Innovative Construction Group (ICG), which is an offsite manufacturer of component parts for houses, such as framing, roof trusses, wall panels, and floor systems.While offsite construction is not necessarily a new idea (it dates back to the 1980s), it never really caught on due to high transportation costs and breakage.
The rationale was labor: Construction workers are hard to find these days, especially skilled construction labor. This purchase is a way to streamline the process, and hopefully allow the company to lower construction costs and increase efficiencies. Pulte doesn't envision the acquisition making an immediate impact on earnings -- it will be more of a learning exercise at first before a nationwide roll-out.
The homebuilding sector has the wind at its back
After homebuilders under-built for most of the post-bubble recovery, the supply demand imbalance is stark. Policy makers are struggling to find levers to encourage more home construction, and the demographics are supportive as the millennial generation enters its prime homebuying years.
Historically, homebuilding has been a highly cyclical, feast-or-famine business, and homebuilder stocks have behaved accordingly. Typically, they trade at lower price-to-earnings ratios during boom periods, since investors invariably fret that a recession could be around the corner. But with Pulte trading at 10.8 times expected 2020 earnings, it seems that the market isn't giving it credit for what should be a multiyear boom in the entire homebuilding sector. One way to play that would be to buy the SPDR S&P Homebuilder ETF (NYSEMKT:XHB), however the index includes non-homebuilding stocks. Pulte is one of the leaders in the sector and would make a good investment for someone who wants a pure-play on housing, along with some potential upside if the ICG merger and offsite manufacturing bears fruit.