Pulte Homes (PHM) reported Q3 2018 earnings on October 23rd. The stock responded favorably with a 7.3% one-day gain. That same day, the S&P 500 (SPY) gapped down and sold off for four more trading days. The index now sits at a near 7-month low while PHM is holding an impressive 24.1% total post-earnings gain. This relative out-performance is consistent with the seasonal strength of home builders (running from November to March), but the behavior is quite contrary to the habitual post-earnings selling the plagued home builders for much of the year. Even after the market returned to post-earnings punishment in response to earnings from KB Home (KBH), PHM recovered all its sympathy losses and then some the very next trading day. Together, these performances make PHM one of my prime targets for buying into the seasonal trade on home builders. I now own shares, and I am looking to accumulate call options.
Q3 earnings helped Pulte Homes (PHM) carve out a V-shaped bottom from a 22-month low.
Source: FreeStockCharts.com
The headline numbers in the earnings report showed strong financial performance:
“For the quarter, the Company reported net income of $290 million, or $1.01 per share compared with prior year net income of $178 million, or $0.58 per share. The higher net income for the period was primarily the result of a 25% increase in homebuilding revenues, in combination with a 190 basis point expansion of operating margin.”
PHM tried to address growing concerns about the housing market head on and assuage those fears:
“While buyer concerns around affordability and rising mortgage rates appear to have impacted near term market dynamics, traffic trends indicate that buyer interest levels are still high and that the overall housing recovery remains on track.”
We now know the commentary on traffic trends directly contradicts the sentiment of builders in general in November, so this part of PHM’s confidence is on watch for confirmation in the next earnings report. In fact, these claims form a large part of the investing thesis in PHM in spite of deteriorating housing data.
PHM also expressed confidence in the value of the company by purchasing 2.4M shares for $67M during the third quarter. The average price of $28.14/share of course turned out to be a significant premium with the stock still trading comfortably below that level.
I found additional useful insights from reading the transcript of the earnings call.
The concerns over the health of the housing market are clearly palpable for PHM management as the CEO tried to address these worries at the very start of the conference call. He even referenced the weakness in the stocks of home builders as evidence of the concerns:
“I would typically focus my opening comments on the strength of our Q3 numbers. But when housing stocks drop over 20% during that same period, it may be more useful to start with the review of market conditions as this seems to be an area of focus for our investors. Based on industry dynamics, we maintain our positive view on the housing market and the overall sustainability of the current housing recovery. We fully appreciate, however, that operating conditions have changed over the past several months…
In what we view as a good operating environment, but one that is arguably more challenging than 6 to 9 months ago, we are well positioned to deliver ongoing financial success.”
