PulteGroup Banks On Land Acquisition Strategy Amid Cost Woes

PulteGroup Inc.’s (NYSE:PHM) prudent land acquisition strategies are likely to drive volume and revenues higher. Additionally, improving housing market fundamentals are regaining optimism for the company.

Shares of PulteGroup have gained 24.1%, outperforming its industry’s 18.9% growth and the S&P 500 Composites’ 10.2% rally, in the past six months. The price performance is mainly backed by solid earnings surprise history, having surpassed the Zacks Consensus Estimates in each of the trailing 10 quarters.

However, higher costs and expenses along with the federal government’s prudent actions have been impacting PulteGroup’s results. Estimates for the company’s 2020 earnings have also moved south over the past 30 days, depicting analysts’ concerns surrounding the stock.

Let’s delve deeper into the factors that substantiate its Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Key Catalysts

PulteGroup, which shares space with Toll Brothers, Inc. (NYSE:TOL) , NVR, Inc. (NYSE:NVR) and D.R. Horton, Inc. (NYSE:DHI) in the same industry, has been generating higher revenues over the past few quarters. Its land acquisition strategy, which emphasizes investing in shorter-lived smaller land assets, while expanding the use of land option agreements when possible to mitigating market risk, is commendable.

Also, the company is maximizing the value of its land assets by selling houses at higher prices and better margins, thereby utilizing the strong cash flow to invest in the business, which enables it to pay off debts and systematically return to its shareholders.

Additionally, PulteGroup is benefiting from robust end-market demand and improving housing market prospects. Overall housing market fundamentals remain positive, backed by declining mortgage rates, steady job and wage growth, and moderate home prices along with ongoing traffic trends, which indicate a higher inclination of buyers and a recovering industry.

Moreover, the company has been reaping benefits from the successful execution of strategic initiatives to boost profitability, with a focus on entry-level homes. First-time buyers represented 31% of orders and 29% of closings in third-quarter 2019 compared with 25% of orders and 26% of closings a year ago. Also, a 13% year-over-year increase in third-quarter order growth was attributed to 39% gain in first-time buyer orders.

Headwinds

Higher costs and expenses related to land, labor, material and other operational expenses are prevailing headwinds since late 2018. Labor shortages are leading to higher wages, while land prices are inflating due to limited availability. Homebuilding SG&A expenses — as a percentage of home sale revenues — were 10.3% in third-quarter 2019, up 50 bps from the prior-year period. Also, adjusted gross margin was down 60 basis points from the prior-year period. These headwinds are also expected to hurt the company in the fourth quarter.

Meanwhile, the federal government’s actions related to economic stimulus, taxation and borrowing limits could affect consumer confidence and spending levels, which in turn could hurt the economy as well as the housing market.

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