2ND UPDATE: Pulte Seen Holding The Line On Home Prices As Orders Drop 29%
Thursday 01/31/2008 3:14 PM ET - Dow Jones News
By John Spence
BOSTON (Dow Jones) -- Pulte Homes Inc.'s orders for new homes fell harder than those of peers in the latest quarter, suggesting it's offering relatively thinner price cuts and incentives, a move that could hurt the home builder later, a Wall Street analyst said.
The Bloomfield Hills, Mich., company (PHM) after Wednesday's closing bell reported a wider fourth-quarter loss as new orders fell 29% from a year earlier to 4,562 units.
"To us, this indicates that Pulte did not respond to market trends as much as Ryland (RYL) and Centex (CTX), which reported order declines of 7% and 10% respectively," wrote Banc of America Securities analysts led by Daniel Oppenheim, in a research note.
"We think this will lead to two issues: further declines in margins when they adjust pricing and more importantly, increased cancellations as buyers in backlog see the lower prices," the report said.
Pulte, the nation's third-largest home builder, reported a loss of $874.7 million, or $3.46 a share. The loss included $543.3 million of charges related to inventory write-downs, other land-related charges and impairment of goodwill. It also took a $622 million charge related to deferred tax assets.
Pulte said it ended the year with $1.1 billion in cash, exceeding its goal, and no debt outstanding under its $1.86 billion revolving credit facility. The company got some breathing room this summer when it renegotiated the covenants with its lenders.
With its focus on the active-adult market, Pulte is "well positioned to take advantage of significant demographic tailwinds," said Morningstar Inc. analyst Eric Landry in his latest review of the company. "Unfortunately, though, it entered the current downturn with too much land and debt, a condition that may hinder its prosperity once demand picks up."
Yet Pulte's chief executive, Richard Dugas, during a conference call Thursday was cautious in his outlook for the U.S. housing market.
"For the home-building industry, the year 2007 will likely be remembered as one of the most difficult and challenging in decades," the CEO said. "Factors that signaled the beginning of this downturn such as high cancellation rates, elevated supply of for-sale homes both new and existing, and the tightening of mortgage availability simply worsened as the year progressed."
Pulte posted its first annual loss in the company's 58-year history.
"By the end of the year gross margins remained under pressure as the competition for home sales intensified during this market downturn," Dugas said. "Consumer confidence continues to be depressed, particularly with higher energy prices and the fear of a recession on the minds of many potential homebuyers."
He added: "The challenging market conditions that plagued 2007 will likely have a significant impact on 2008 as well."
Citing ongoing weakness in housing, Pulte forecast a first-quarter net loss from continuing operations in the range of 15 cents to 30 cents a share, not including additional impairments or land charges.
Pulte's strategy since the third quarter of 2007 has been mothballing communities rather than selling homes at a deep discount, according to Anna Torma at Soleil Securities Group. "Additionally, the company announced it would reduce pricing and use incentives only in select communities where closings would lead to positive cash-flow generation," the analyst said.
Dugas said on the conference call that the company has more than 50 communities that are mothballed.
"Obviously, it makes a heck of a lot more sense to put a community in mothball in this demand environment when we haven't put in a lot other than the acquisition of the land money into the ground," he said.
Pulte shares had lost nearly 60% over the past year heading into Thursday's session, but the stock was up 14% in afternoon trading as the home-builder sector rallied.
"With the expected loss in the first quarter and deteriorating order trends ... more impairment charges and book value erosion are likely to continue for the foreseeable future," said Paul Puryear at Raymond James & Associates. "The strong quarterly cash flow, though, could shore up any near-term liquidity concerns."
Analyst James Wilson at JMP Securities reiterated his market-perform rating on Pulte's stock. "Pulte has now impaired close to 25% of its peak inventory level, which is short of some that have gone over 30%, but we believe Pulte's heavy investment in Del Webb [active-adult retirement] communities, which have performed better than conventional housing, should limit the level of future impairments," he said.
Last week, home-builder bellwethers Lennar Corp. (LEN) and Ryland both reported quarterly losses.
> Dow Jones Newswires
01-31-08 1514ET
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