We are saved. SmithBarney which has "buy" on Pulte said Pulte's probles are completely:
1. LV specific
2. Pulte specific
As a follow-up to our note today regarding Pulte’s difficulties in Las Vegas, we offer additional commentary on the company’s revised earnings guidance. After the market close, Pulte confirmed that it had cut prices an average of 14% in the Las Vegas market and lowered its 3Q04 and FY04 earnings guidance ranges by $0.05 and $0.30-$0.40 per share,
respectively (to below Street consensus). In a quickly arranged conference call with investors, Pulte indicated that its internal controls had failed to warn them that the
company’s home price gains had far outpaced comparable product in the Las Vegas market, which left the company vulnerable to the current rash of cancellations. Accordingly, over this
past weekend, it slashed prices down from an average of $490,000 to $419,000, and offered this discount to homebuyers in its backlog.
In our earlier comment, we made the following three points: 1) We strongly suspected that much of this was company-specific, 2) We had seen no evidence yet that this price action had spread beyond Las Vegas, and 3) Our estimates for Pulte were among the lowest on the Street. Following the call, we remain convinced that this is a company-specific event, that it is limited to the Vegas market, and we note that the company essentially guided Street estimates down to our level. Overall, we are slightly reducing our target multiple on the
stock to reflect a diminishment in management credibility, but we are maintaining our estimates and 1H rating on the shares.
Management confirmed that the problems in Las Vegas are company-specific.
Management stressed that its price cuts were directly caused by overly aggressive price increases in the past year that skewed its pricing relative to the market, not by a wholesale
collapse in the market. On the conference call today, it indicated that Pulte’s product was priced 20% or more above the comparables, and that they were essentially bringing prices down to the level of the competition. Specifically, management indicated that it has now lowered prices in the market by roughly $70,000 per home (approximately $490,000 to $420,000). While Pulte’s actions will clearly exacerbate the situation in Las Vegas, our conversations with the other large builders in that city suggest that their business remains healthy, with little to no unusual discounting.
The company’s new guidance is in line with our original estimate for this year.
The company lowered 3Q EPS guidance from a range of $2.00-$2.10 to $1.95-$2.05 and lowered guidance for the year from a range of $7.80-$8.00 to $7.40-$7.70. While these figures are below the Street consensus, our ‘04 estimates were already in these ranges, and remain unchanged. In addition, we note that our FY05 and FY06 estimates are also unchanged and remain below company guidance.
Pulte’s pricing outside of Las Vegas appears rational.
Management analyzed several of its other markets to judge the company’s pricing relative to that of its competitors and indicated that the above-market pricing issue appears to only be present in Las Vegas. While we do not dispute that other markets in the country have sustained considerable price increases, the company’s analysis would seem to indicate that
Pulte has acted more rationally in its pricing decisions in these other markets.
POTENTIAL RISKS
The Las Vegas market could weaken further as speculative buyers unload inventory.
In particular, Pulte noted on its conference call that the number of existing homes for sale has tripled from the first quarter of the year to 15,000. We believe this build up in existing inventory for sale may be a reflection of speculative buyers reaching their one-year anniversary looking to lock in long-term capital gains. Since we believe speculative buying
likely peaked earlier this year, this increase in investment units for sale could continue for another few quarters before abating.
Management’s credibility is an additional concern.
We believe today’s announcement clearly indicates shortcomings in the company’s internal controls, and through this earnings preannouncement management has lost a considerable amount of credibility with the Street. Our target price reduction reflects a half-point P/E haircut to reflect reduced management credibility.</p> |
