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How PulteGroup May Be Failing You

By Seth Jayson - Updated Apr 6, 2017 at 9:55PM

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Keep your eye on margins.

Margins matter. The more PulteGroup (NYSE: PHM) keeps of each buck it earns in revenue, the more money it has to invest in growth, fund new strategic plans, or (gasp!) distribute to shareholders. Healthy margins often separate pretenders from the best stocks in the market.  That's why I check on my holdings' margins at least once a quarter. I'm looking for the absolute numbers, comparisons to sector peers and competitors, and any trend that may tell me how strong PulteGroup's competitive position could be.

Here's the current margin snapshot for PulteGroup and some of its sector and industry peers and direct competitors.

Company

TTM Gross Margin

TTM Operating Margin

TTM Net Margin

PulteGroup

12.9%

(6.7%)

(25.8%)

Toll Brothers (NYSE: TOL)

16.1%

(1.0%)

2.7%

DR Horton (NYSE: DHI)

16.8%

3.8%

1.3%

KB Home (NYSE: KBH)

18.5%

(0.6%)

(8.5%)

Source: Capital IQ, a division of Standard & Poor's. TTM = trailing 12 months.

Unfortunately, that table doesn't tell us much about where PulteGroup has been, or where it's going. A company with rising gross and operating margins often fuels its growth by increasing demand for its products. If it sells more units while keeping costs in check, its profitability increases. Conversely, a company with gross margins that inch downward over time is often losing out to competition, and possibly engaging in a race to the bottom on prices. If it can't make up for this problem by cutting costs -- and most companies can't -- then both the business and its shares face a decidedly bleak outlook.

Of course, over the short term, the kind of economic shocks we recently experienced can drastically affect a company's profitability. That's why I like to look at five fiscal years' worth of margins, along with the results for the trailing 12 months, the last fiscal year, and last fiscal quarter. You can't always reach a hard conclusion about your company's health, but you can better understand what to expect, and what to watch.

Here's the margin picture for PulteGroup over the past few years.

Source: Capital IQ, a division of Standard & Poor's. Dollar amounts in millions. FY= fiscal year. TTM = trailing 12 months.

Because of seasonality in some businesses, the numbers for the last period on the right -- the TTM figures -- aren't always comparable to the FY results preceding them. To compare quarterly margins to their prior-year levels, consult this chart.

Source: Capital IQ, a division of Standard & Poor's. Dollar amounts in millions. FQ = fiscal quarter.

Here's how the stats break down:

  • Over the past five years, gross margin peaked at 13.3% and averaged 11%. Operating margin peaked at 10.3% and averaged -0.6%. Net margin peaked at 4.8% and averaged -19.2%.
  • TTM gross margin is 12.9%, 190 basis points better than the five-year average. TTM operating margin is -6.7%, 610 basis points worse than the five-year average. TTM net margin is -25.8%, 660 basis points worse than the five-year average.

With recent TTM operating margins below historical averages, PulteGroup has some work to do.

If you take the time to read past the headlines and crack a filing now and then, you're probably ahead of 95% of the market's individual investors. To stay ahead, learn more about how I use analysis like this to help me uncover the best returns in the stock market. Got an opinion on the margins at PulteGroup? Let us know in the comments below.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

PulteGroup, Inc. Stock Quote
PulteGroup, Inc.
PHM
$54.67 (1.30%) $0.70
Toll Brothers, Inc. Stock Quote
Toll Brothers, Inc.
TOL
$71.24 (0.55%) $0.39
KB Home Stock Quote
KB Home
KBH
$44.12 (-0.43%) $0.19
D.R. Horton, Inc. Stock Quote
D.R. Horton, Inc.
DHI
$106.16 (0.43%) $0.45

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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