By Tomi Kilgore, MarketWatch
PulteGroup Inc. said Tuesday it believes one way to help solve the affordability problems that home buyers are facing is to increase its focus on lower-priced homes for first-time buyers, although that’s likely to weigh on gross margins.
The home builder’s stock /zigman2/quotes/201694804/composite PHM -1.51% surged 3.7% to the highest close since June 2018. It was among the biggest gainers in the SPDR S&P Homebuilders ETF /zigman2/quotes/202739297/composite XHB -0.90% , which rose 1.1%.
The rally comes after Pulte reported a first-quarter profit, revenue and new orders that beat expectations. In addition, gross margin was 23.4%, down from 23.6% a year ago but above the FactSet consensus of 22.2%, boosted by geographic mix of higher-margin sales. Read more about Pulte’s earnings.
Also helping lift sentiment, the Commerce Department said March new-home sales rose 4.5% from February to a seasonally adjusted annual rate of 692,000 , well above the MarketWatch consensus of 656,000.
And Chief Executive Ryan Marshall provided an upbeat outlook for the housing market.
“Helped by the recent decline in mortgage rates, home buyers have been steadily returning to the market after a period of slowing demand that began in the second half of 2018,” Marshall said. “Given the very positive macroeconomic backdrop, we continue to maintain a constructive view on the overall housing cycle and are pleased with our competitive position in the markets in which we operate.”
For the second quarter, the company said it expects gross margin of 22.8% to 23.3%, down from 24.0% a year ago, and below what was recorded in the sequential first quarter.
“While buyer interest remains high, the overall pricing environment is more challenging than this time last year,” said Chief Financial Officer Robert O’Shaughnessy on the post-earnings conference call with analysts, according to a transcript provided by FactSet.
To help combat the “affordability challenges” in the housing market, CEO Marshall said that the pipeline of lots at the end of the first quarter consisted of 35% targeted for first-time buyers, compared with first-quarter orders of 30% and 30% of targeted lots in the first-quarter of last year.
That compares with 30% of lots targeted for “move-up” buyers and 35% of lots for active adult communities at the end of the latest quarter.
And for perspective, the average sales price during the quarter was $351,000 for first-time buyers, $476,000 for move-up buyers and $391,000 for active adult buyers.
“Certainly, our transition to a larger percentage of lower-priced first-time buyer lots and the recent decline in mortgage rates can help solve some of the affordability challenges that today’s home buyers are facing,” Marshall said. “However, our real opportunity lies in lowering house cost not just for first-time buyers, but across our entire planned portfolio.”
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Among ways Pulte is taking to control costs is by looking at basic floor plan designs, on-site and off-site build processes and offering different options, for everything from flooring, cabinets, countertops and structural options.
Analyst Kenneth Leon at CFRA affirmed his hold rating on Pulte’s stock but raised his price target to $33 from $30.
“[Pulte] is shifting its product mix to more starter homes and adult communities,” Leon wrote in a note to clients.
“We think [average selling prices] may come under pressure to boost the pace of new orders, if higher traffic does not translate to new sales,” Leon wrote.
For the first quarter, Pulte reported net income of $166.8 million, or 59 cents a share, compared with $170.8 million, or 59 cents a share, in the same period a year ago, beating the FactSet EPS consensus of 47 cents.
Revenue increased 1.4% to $2.00 billion, above the FactSet consensus of $1.93 billion, as a 2% increase in home sale revenue to $1.9 billion was driven by a 2% increase in average selling price to $421,000. New orders totaled 6,463 homes valued at $2.7 billion, down from 6,875 homes valued at $2.9 billion a year ago, and above new-orders expectations of 6,358 valued at $2.7 billion.
Pulte’s stock has run up 20.6% year to date, while the homebuilders ETF has soared 26.8% and the S&P 500 index /zigman2/quotes/210599714/realtime SPX +0.39% has climbed 17.0%.