Pulte CEO Affirms '06 View, But Analysts Are Skeptical
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By Janet Morrissey
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--Pulte Homes Inc. (PHM) Chief Executive Richard Dugas expressed cautious optimism that his home-building company will achieve its 2006 target for earnings in the range of $6 and $6.25 a share despite a sharp slowdown in demand for houses in certain markets and uncertainty in others. However, many analysts are skeptical the company will meet its goal.
During a conference call Thursday, Dugas affirmed the 2006 guidance, but warned that the company's second quarter would likely come up short and that much of the sales and revenue would likely come in the second half of the year when he expects housing conditions to improve.
"Conditions in many markets across the country are transitioning through noticeable levels of change - some for the better and some for the worse," said Dugas, during the conference call.
He said he is confident that Pulte's geographic diversity will allow it to offset softness in some markets with accelerating demand in other cities.
However, this could be a significant challenge, considering orders were down in all of Pulte's markets in the latest quarter except the Central region.
Pulte's orders fell 11% in its first quarter, with demand falling off in the Northeast, Southeast, Midwest and Western regions by 29%, 9%, 13%, and 15%, respectively. Only the Central area was up, with orders rising 7%.
At the same time, gross profit margins contracted to 22.9% from 24.6% a year ago, which indicates that the company was likely boosting incentives to move sales - even though sales continued to decline. Dugas blamed the shrinking margins on a change in product mix and higher land, labor and building-material costs.
Still, Dugas said market watchers shouldn't paint the entire housing industry with one broad brush as conditions vary from market to market.
Hardest hit are markets that experienced huge price increases over the past two years. Dugas said markets such as Sacramento, San Diego and Northern Virginia, appear to be in the midst of a material correction where house prices are falling, cancellations are surging, traffic is slowing and incentives are up.
But other markets, such as Nevada and Southern California, are experiencing a "soft landing," where demand and pricing is simply returning to more "normalized" levels. Still, other markets, such as the Carolinas, Texas and active adult communities, are seeing demand accelerate.
He admits his company is boosting incentives in some markets - but vows not to go overboard just to move sales.
"Blindly driving for unit volumes is not the right answer," he said.
Instead, Pulte is making cost-cutting measures, such as reducing overhead and sharpening its pencil on land deals, as demand slows. He also said more emphasis would be placed on share buybacks, debt reductions and acquisitions.
Dugas cut his guidance for the second quarter to a range of $1 to $1.10, down from Thomson First Call's estimate of $1.33. He said he expects demand and fundamentals to improve in the second half of the year, and affirmed his 2006 guidance in the range of $6 to $6.25 a share.
During the call, many analysts and investors appeared skeptical that the company could achieve its 2006 earnings target after seeing the sharp drop off in demand in the first quarter.
"Your first quarter came in light and it looks like your second quarter is going to be light relative to our expectations. So, it's just not clear why you would be re-affirming the guidance," said UBS analyst Margaret Whelan, during the call. "It seems like we're going to be disappointed later in the year," she said.
Whelan cut her 2006 estimate to $5.75 a share.
"We think it may be difficult to achieve guidance based on sequential weakness in pricing and traffic that we continue to see," said Banc of America analyst Dan Oppenheim, in a note. "We think that an assumption of improved results at the end of the year may be too optimistic, given that current orders likely offer lower margins than homes closed in the most recent quarter."
Oppenheim also disputed the company's contention that demand for active adult housing remains strong. "Other companies - public and private - have suggested that their active adult business has softened, potentially more than the traditional business, as potential buyers have difficulty selling existing homes," he said.
Oppenheim and Whelan don't hold shares in Pulte, but their firms have had investment-banking relationships with the company over the past 12 months.
In the first quarter, revenue rose 17% to $2.91 billion from $2.49 billion a year ago. Net income stood at $262.6 million, or $1.01 a share, up 20% from $218.2 million, or 83 cents, a year earlier. Results in the latest quarter included a gain of 8 cents a share related to the sale of Pulte's Mexico-based mortgage-banking business.
Pulte's shares recently traded at $37.73, off $1.31, or 3.4%, on volume of 4.2 million shares compared with average daily volume of 2.7 million.
-By Janet Morrissey, Dow Jones Newswires; 201-938-2118
(END) Dow Jones Newswires
April 27, 2006 14:02 ET (18:02 GMT)
Copyright (c) 2006 Dow Jones & Company, Inc.- - 02 02 PM EDT 04-27-06 |
