Edit Metric
|
||||||||||||||||||||
Details
|
||||||||||||||
Pulte Homes (PHM)Stock (Real Estate Industry, Residential Construction Industry)
Pulte Homes (PHM) is a homebuilder. In 2006, the company sold 41,487 homes across 27 states in all regions of the country.[1] Pulte targets first-time and move-up buyers, with most of its properties being single-family detached homes. At an average home selling price of $337,000, the company offers homes that are more expensive than the national median home price of around $210,000.[2] The company operates in a highly cyclical industry. New home construction, home prices and new home sales volume are heavily dependent upon job growth, interest rates, and the business cycle at large. Low interest rates and high job growth bode well for homebuilding, but as the recent subprime lending crisis and depressed housing market has illustrated, things can sour quickly and the business can be difficult to predict. Key homebuilding numbers, such as housing starts and existing home sales have continued to come in weak of late. Homebuilding is highly competitive and marked by few barriers to entry, low profit margins, and high financial leverage.
[edit] Financial Information and Operating MetricsBelow is a breakdown of company revenue by region, along with a chart depicting the company's revenue and operating profit. Recently, the company's operating profit has been hit largely by falling home prices. As discussed below, when home prices in the company's geographic operating areas fall, the company must either write down the value of its unsold home inventory or, when it does sell the inventory, take a substantial hit to its margins. This is largely because of the lag time between constructing and then selling a new home -- if the company builds a home at $150,000 and expects to sell it at $200,000 given market prices, any change in the market value of the home erodes the originally anticipated $50,000 profit because the construction expense is largely fixed.   Below is a table of relevant operating metrics for the company. Last year, the company sold fewer homes than in previous years, though that was partially offset by an increase in the average home selling price. Rising construction costs and slower than anticipated home price appreciation pressured operating margins and overall, profit fell.
[edit] Notes on Homebuilder AccountingThe accepted accounting principles for homebuilders can be a bit convoluted, and it is important that investors understand certain non-intuitive accounting methodologies. Here are a few notable accounting conventions for builders that may not be immediately clear to investors:
[edit] Trends & Drivers[edit] Interest RatesInterest rates have several critical effects on the company.[6] In general, rising rates spell bad news for all homebuilders for several reasons:
[edit] The U.S. Housing Market CyclicalityHomebuilding is a highly cyclical business and is often a beneficiary and victim of business cycles. Demand for homes is dependent upon the strength of the job market, growth in gross and per capita GDP, the level of interest rates and the availability of mortgage financing.[7] When growth is strong, interest rates are low, and employment is robust, potential first time homeowners and those wishing to relocate can pursue new homes more readily. Thus, more people buy homes, which drives the volume and pricing at which the company can sell its home inventory. On the other hand, high rates, high unemployment and slowing GDP growth hamper demand for new homes, in which case the company can struggle to unload existing inventory and may have to cut back on new home construction. [edit] The subprime crisis and home prices.As mentioned above, home prices and the level of new home construction are driven by macroeconomic variables like GDP growth, interest rates and employment. In a favorable economic environment, rising housing prices can lead to lax lending standards and, sometimes, exuberance as collateral values rise, which further fuels price increases. As has happened recently, however, home prices across the country can also experience sharp declines when this exuberance catches up to buyers and lenders. Currently, in part because of a vicious cycle fed by the subprime mortgage crisis, in which mortgage borrowers with poor credit histories or little documentation have struggled to meet payments, home prices in many areas have been in a whirlwind of decline. This, in turn, further exacerbates default rates since these borrowers cannot refinance mortgages given deterioration of collateral. The company, of course, assumes the risk of continued price declines and hampered demand in its areas of operations. If home prices stay depressed for extended periods, the company may have to write down the value of its properties or sell them off at heavily reduced gross margins or losses. With its average customer having a FICO score of 743 and taking a mortgage with a loan-to-value ratio of 82%,[8] Pulte has not experienced the effects of subprime lending as directly as other lenders and homebuilders. However, the spillover and contagion effects from the subprime debacle has effected all builders by accelerating and worsening the current housing downturn. [edit] Geographic diversity and sizeDeveloping sustainable competitive advantages of scale can be difficult for homebuilders. Pulte, for instance, uses independent contractors for construction activities,[9] so there are limits to the level of volume discounts they might be able to extract. Nonetheless, as a national player and larger homebuilder, the company may be more readily able to benefit from economies of scale within its geographic regions and by spreading corporate overhead across a wider base of homes sold. Furthermore, the geographic diversity of the firm relative to some smaller competitors limits the risk of isolated housing depressions in any one market. [edit] CompetitionThe company competes against a highly fragmented base of other homebuilders. These companies may be national or local players and given the highly competitive nature of the industry, competition is stiff and often marked by low margins and low returns on capital. The company also competes for buyers with existing homes that have hit the market, and competes more broadly with other housing alternatives such as apartments and mobile homes. Below is a table comparing metrics from several competing publicly traded homebuilders. Note that no company has anything close to a dominant national market share, and the industry generally is marked by low operating margins (and high debt to finance construction expenses).[10]
 Pulte Homes2004 Data 2005 Data 2006 Data 2007 Data 2008 Data Most Recent Data Available
[edit] Footnotes
|
The Shelf
|
Edit
History
Bookmark
