PulteGroup, Inc. (PHM), Toll Brothers Inc (TOL): The Great Unanswered Question

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I hate it when I’m looking at an earnings report and I’m left with a big unanswered question. Unfortunately, that’s exactly what investors have been getting from PulteGroup, Inc. (NYSE:PHM). Each time the company reports earnings, they report numbers like revenue growth, backlog growth, margins, and balance sheet strength. However, there is one number that is left out, and that is the all important cancellation rate. What is even more disconcerting is, all of PulteGroup, Inc. (NYSE:PHM)’s peers report this number every quarter. The question for investors is, does PulteGroup, Inc. (NYSE:PHM) have something to hide?

PulteGroup, Inc. (NYSE:PHM)

Impressive Results?

There are a few key numbers that investors need to keep track of when it comes to home builders. One way to gauge PulteGroup, Inc. (NYSE:PHM)’s performance versus their competition is by looking at their operating margin. Home builders essentially compete in a commodity-based business. Each company may have their specialties, but there is no denying that homes are essentially made of the same basic materials.

Some of PulteGroup, Inc. (NYSE:PHM)’s competitors are Toll Brothers Inc (NYSE:TOL), Lennar Corporation (NYSE:LEN), and KB Home (NYSE:KBH). While Toll operates in the higher-end housing market, and the others are more direct competitors, they all compete for the customer’s home-building dollar. When it comes to profits, one way to compare these companies is by their operating margins. The leader of the group by this measure is Lennar Corporation (NYSE:LEN) with an operating margin of 13.3%, but PulteGroup, Inc. (NYSE:PHM) comes in second with a respectable 7.49% margin. By comparison, KB Home (NYSE:KBH)’s margin of 4.69% and Toll Brothers Inc (NYSE:TOL)’ margin of 1.81% look low.

A second way to compare these companies is by looking at their selling, general, and administrative expenses versus their revenue. A company that can leverage their expenses against larger revenue may deliver better profits and cash flow. The best by this measure is Lennar Corporation (NYSE:LEN) with an SG&A percentage of just 10.9%. Again PulteGroup comes in second by this measure at 11.8%. KB Home (NYSE:KBH) and Toll Brothers Inc (NYSE:TOL) spend a higher relative percentage at 13.4% and 15.4% respectively.

One big challenge facing home builders on an ongoing basis is managing the debt required to make their projects happen. These companies are forced to take on debt to fund their projects and then hope that the homes sell to recoup their expenses and make a profit. PulteGroup and their peers Lennar Corporation (NYSE:LEN) and KB Home (NYSE:KBH) each are not only home builders, but they also offer financing divisions. This causes each of these companies to carry more relative debt than Toll Brothers Inc (NYSE:TOL) that offers no financing division.

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