PulteGroup profit falls 18.8% as orders drop 6 percent

PulteGroup reported third-quarter net income of $476 million, down from $586 million a year earlier, as higher mortgage rates cut buyer traffic and slowed new orders. The homebuilder earnings report showed earnings of $2.53 per diluted share, down 14.5 percent from $2.96 a year earlier and below the consensus estimate of $2.63. Total revenue fell 9.8 percent to $3.97 billion, and income before income taxes dropped 18.6 percent to $625.2 million. Return on equity was 15.21 percent and the net margin was 11.62 percent.

Net new orders totaled 6,208 homes, down 6 percent from the prior year, as a 13 percent drop in the absorption pace more than offset a 7 percent rise in average community count. The absorption pace was 1.9 homes per month, down from 2.2 a year earlier, and was lowest in September as interest rates surged. Home closings fell 9 percent to 6,876 homes, and home sale revenue dropped 9 percent to $3.9 billion. The average price of homes closed slipped 1 percent to $561,000.

Traffic to PulteGroup communities fell 14 percent from a year earlier and 11 percent from the second quarter, with the slowdown sharpest in September as rates climbed through the month. First-time buyers pulled back hardest, the company said.

"What changed in the quarter, and most notably in September, is that the big move higher in interest rates, along with inflation, global tensions, and waning confidence, reached the point where more consumers simply put their search on pause," President and CEO Ryan Marshall said.

The cancellation rate was 10 percent of starting backlog, down from 12 percent last year and down from the second quarter, a sign that PulteGroup buyers under contract stayed committed to closing even as demand softened.

PulteGroup earnings and gross margin

Reported home sale gross margin came in at 24.8 percent, down from 26.2 percent a year earlier, including $26 million of land impairments, about 70 basis points. Incentives represented 10.4 percent of revenue.

Build costs declined 5 percent from a year earlier. PulteGroup ended the quarter with $1.4 billion of cash and net debt to capital of just 3 percent, and the company repurchased $350 million of stock during the quarter, bringing shareholder returns for the year to about $1.2 billion.

Management kept its full-year gross margin outlook at 24.5 percent to 25.0 percent, citing disciplined pricing, lower construction costs and controlled inventory. The homebuilder earnings guidance for the fourth quarter reflects heavier incentives to convert spec inventory.

PulteGroup orders by buyer group

Net new orders among first-time buyers fell 9 percent and among move-up buyers fell 14 percent from a year earlier, reflecting ongoing weakness within the move-up group in Texas and the West. Active-adult orders rose 11 percent, helped by prior-year land investments and community count growth, with move-up and active-adult buyers accounting for more than 60 percent of PulteGroup's business.

The company now expects full-year home closings of 27,000 to 27,500 homes, with fourth-quarter margin of 24.0 percent to 24.5 percent and full-year SG&A of 10.3 percent to 10.5 percent of revenue. The backlog grew to 10,298 homes valued at $6.4 billion, up from 9,888 homes valued at $6.2 billion a year earlier. Shares of PulteGroup fell almost 6 percent after the earnings release, as investors weighed the order slowdown against the builder's cash position.