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This Company Could Build a Fortune in Housing

By Neha Chamaria
February 7, 2012
Article from The Motley Fools

I wasn't very upbeat on the nation's largest homebuilder, PulteGroup (NYSE: PHM  ) , until its previous quarter, but the company is now compelling me to give it more attention. Even though its numbers need to buck up a little, there's something that is worth noting. Read along to know what it is.

Needs to pull up its socks

Pulte's revenue grew by just 1% from the year-ago quarter, to $1.2 billion. While average selling prices rose 3%, home closings failed to look up. They declined 2% from the comparable period last year.

Pulte's orders were up by nearly 8%, to 3,084 units, and its backlog (a key indicator of future revenue) went down to 3,924 homes from 3,984 homes a year ago. While a rise in orders is good, I'd like to see Pulte complementing it with higher deliveries. In the case of smaller homebuilder Beazer Homes (NYSE: BZH  ) , which reported numbers at the same time as Pulte, fourth-quarter orders and closings surged 36% and 67%, respectively. Even peer Lennar's (NYSE: LEN  ) fourth-quarter orders climbed 20% to 3,027 homes while deliveries were up 9%.  

In a quarter that's considered strong for homebuilders, Pulte's numbers leave much to be desired. Yet its balance sheet initiatives deserve a round of applause.

Trimming and grinning

Pulte is finding wiser ways to use cash: It is taking money out of unprofitable ventures and devising ways to save costs.

During the fourth quarter, Pulte sold off 3,500 land lots worth nearly $64 million, resulting in a net gain of $6 million. Purchased long back, these properties demanded significant investments in order to generate high returns. The money released from the sale can now be redirected to more profitable projects. Pulte's initial plan is to buy back debt using the excess money. It repurchased around $260 million worth of debt in the fourth quarter, improving its total debt-to-equity ratio to 159.3% from 168.4% in the previous quarter. The company still has a huge cash balance of $1.1 billion to carry out future plans.

Pulte is also resizing its operations to cut down costs. In the quarter, it's selling, general, and administration margin improved to 9.3% from 11.8% in the same period last year. Reduction in these expenses had helped Pulte lower losses in its third quarter as well.

The Foolish bottom line

I am surely giving a green thumbs-up to Pulte's cost reduction initiatives, but a heavier order bag and lighter deliveries bag would be the icing on the cake. Once that happens, the company could turn out to be a winner. So am I changing my stance on Pulte so soon? No, not completely. But I'll make sure I keep Pulte on my radar. You can do so, too, by adding it to My Watchlist, our free and personalized stock-tracking service.

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Article from The Motley Fools

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