What's Good and What's Bad About This Homebuilder

Motley Fool Staff
Updated

PulteGroup's (NYS: PHM) losses have narrowed dramatically, but there's not much to cheer about here. One smart move -- keeping a tight grip on costs -- helped PulteGroup sweeten its bottom line even though the housing market is still in terrible shape.

PulteGroup's narrowing third-quarter losses are heartening, but the company is yet to be in the black. And there are other reasons why I am not yet very upbeat about PulteGroup's numbers as well.

Stopping the bleeding
PulteGroup's homebuilding revenues climbed 7% from the year-ago quarter to $1.1 billion. Although selling prices fell 1%, what's impressive is the 9% rise in home closings.

PulteGroup has taken the initiative in cost-cutting -- the company's selling, general, and administrative expenses amounted to only $121.6 million as compared to $425.6 million in the third quarter last year. This, along with a one-time charge of $241 million and a tax benefit of $73 million, helped PulteGroup narrow its losses by a huge margin to $129.3 million from $995.1 million last year.

All's not so great
Some things, however, are not as good with PulteGroup as they are with its peers. Its new orders and backlogs haven't gone up, unlike other homebuilders.

Higher orders for most homebuilders indicate how buyers are gradually getting over the memories of the now-expired federal tax credits and are returning to the housing market. Beazer Homes' (NYS: BZH) net new orders rose by 23.7% in its third quarter, and it has recently announced a 33% jump in its fourth-quarter orders. Standard Pacific (NYS: SPF) has reported an awesome 38% jump in its third-quarter net new orders. Compare these with PulteGroup's flat net new home orders year-on-year, and you start wondering -- when will homebuyers flock to PulteGroup?

What's even sadder is the fall in PulteGroup's backlogs -- an important indicator of future revenues -- to 5,143 units from 5,345 units last year. Comparatively, Standard's backlogs were up a whopping 40% and Hovnanian Enterprises' (NYS: HOV) backlogs jumped 14% from last year in their respective third quarters. Even KB Home (NYS: KBH) reported a 22% rise in backlog units in spite of a 27% slump in its third-quarter revenues. Looks like PulteGroup still has a long way to go.

What's up with the market?
The housing market has been grabbing headlines lately, and for a change it's all positive.

First was the National Association of Home Builders/Wells Fargo Housing Market Index data that sent homebuilder stocks in a tizzy. The index posted the highest one-month gain in more than a year, which suggests buoyant consumer confidence in the housing market.

The White House then came up with a plan that will relax refinancing rules, making it easier for homebuilders to take advantage of rock-bottom interest rates and refinance their mortgages.

The Standard & Poor's/Case-Shiller Home Price Indices also show August as the fifth consecutive month of rising home prices. And finally, as per data released by the U.S. Commerce Department, sales of new homes in September have come in above forecasts, rising by 5.7% from August levels.

I am not saying the housing sector is necessarily turning around. High unemployment, economic uncertainty, stringent lending norms, piled up inventory -- too many problems prevail. But, the fact that some crucial metrics are improving is indeed an optimistic sign.

The Foolish bottom line
PulteGroup's losses might have narrowed, but I'd like to wait for some more improvement in its numbers as the housing market slowly stumbles back to life. To be the first to know when it happens, make sure to add PulteGroup to our watchlist service, My Watchlist. It's free, and it helps you constantly stay updated on news and analysis on your favorite companies.

At the time thisarticle was published Neha Chamaria does not own shares of any of the companies mentioned in this article. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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