Pulte Homes Up 11% in Spite of Bad Earnings

| About: PulteGroup, Inc. (PHM)

I am going to start watching the trio of Ryland (NYSE:RYL), Toll Brothers (NYSE:TOL), and Pulte Homes (NYSE:PHM) since one of these (or a basket of all 3) will eventually make up my homebuilder stake in the fund. While I still think it is too early to get involved in these names other than for short term trades, the market seems to think what is happening with the interest rate/rebates/bailout scenario is already enough to jump start the housing market.

Obviously my countless commentaries point to me not agreeing, but I am always open to the fact I can be wrong. As I say nearly every day "Perception is Reality" - if perception is the housing market will turn in the fall, than it does not matter if it's truth or not - as long as it is believed, the stocks can react very well, no matter what the reality is on the ground half a year later.

It is interesting to watch Pulte jump 11% on what I would consider to be an abysmal report. But again, the market is forward looking and the assumption is (it appears) by next fall our home market will have bottomed. I won't be on that bandwagon, but the stock action is the stock action, and one must respect it. I like Pulte for the active - adult market, and this was one of the stocks I used to trade in my personal account during the "good times" in 2003-2005. Let's see what they have said

  • Pulte Homes (PHM) reported a wider fourth-quarter loss as new orders fell 29% from a year earlier to 4,562 units.
  • To us, this indicates that Pulte did not respond to market trends as much as Ryland (RYL) or Centex (CTX) which reported order declines of 7% and 10% respectively," wrote Banc of America Securities analysts led by Daniel Oppenheim, in a research note.
  • "We think this will lead to two issues: further declines in margins when they adjust pricing and more importantly, increased cancellations as buyers in backlog see the lower prices," the report said.
  • Pulte, the nation's third-largest home builder, reported a loss of $874.7 million, or $3.46 a share. The loss included $543.3 million of charges related to inventory write-downs, other land-related charges and impairment of goodwill. It also took a $622 million charge related to deferred tax assets.
  • Pulte said it ended the year with $1.1 billion in cash, exceeding its goal, and no debt outstanding under its $1.86 billion revolving credit facility. The company got some breathing room this summer when it renegotiated the covenants with its lenders.
  • With its focus on the active-adult market, Pulte is "well positioned to take advantage of significant demographic tailwinds," said Morningstar Inc. analyst Eric Landry in his latest review of the company. "Unfortunately, though, it entered the current downturn with too much land and debt, a condition that may hinder its prosperity once demand picks up."
  • Yet Pulte's chief executive, Richard Dugas, during a conference call Thursday was cautious in his outlook for the U.S. housing market. "For the home-building industry, the year 2007 will likely be remembered as one of the most difficult and challenging in decades," the CEO said. "Factors that signaled the beginning of this downturn such as high cancellation rates, elevated supply of for-sale homes both new and existing, and the tightening of mortgage availability simply worsened as the year progressed."
  • "By the end of the year gross margins remained under pressure as the competition for home sales intensified during this market downturn," Dugas said. "Consumer confidence continues to be depressed, particularly with higher energy prices and the fear of a recession on the minds of many potential homebuyers." He added: "The challenging market conditions that plagued 2007 will likely have a significant impact on 2008 as well."
  • Pulte's strategy since the third quarter of 2007 has been mothballing communities rather than selling homes at a deep discount, according to Anna Torma at Soleil Securities Group. "Additionally, the company announced it would reduce pricing and use incentives only in select communities where closings would lead to positive cash-flow generation," the analyst said.

So overall, outside of the ugly numbers... are some ugly words from the CEO about 2008 (no quick turnaround folks). That said, the market is ignoring the CEO and saying "we know better than the CEOs in the industry and it's time to take homebuilder stocks up because the Fed fixes everything". I happen to agree with the CEOs, but the stock market disagrees with me and the CEOs for now.

Disclosure:No positions

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