×

UPDATE 3-Pulte profit, orders grow but investors cautious

* Homebuilder posts highest earnings since 2006

* Q3 earnings 30 cts/share vs year-ago loss of 34 cents

* New home orders rise 27 pct in quarter

* Shares fall 2.5 pct

Oct 25 (Reuters) - PulteGroup Inc, the second-biggest U.S. homebuilder, reported its highest quarterly earnings since the collapse of the housing market, thanks to a surge in new orders and increased sales of new homes at higher prices.

The results added to perceptions that the U.S. housing market is starting to recover after the worst downturn since the Great Depression. Home building this year could add to U.S. economic growth for the first time since 2005.

Pulte's shares fell, however, on investor nervousness over the homebuilder's possible exposure to bad loans, analysts said. The stock was also hurt by a smaller-than-expected rise in contracts to buy previously owned U.S. homes in September, analysts said. The National Association of Realtors said on Thursday that its Pending Home Sales Index gained 0.3 percent to 99.5.

Pulte shares pared losses to close 2.5 percent lower at $17.01. The shares have risen by about 170 percent so far this year.

On an earnings call with analysts on Thursday, Chief Executive Richard Dugas said that lenders, including Fannie Mae and Freddie Mac, were asking Pulte to buy back 150 to 200 bad loans per month, up from 50 to 100 a month in last year's third quarter. If the current level of requests continues, the company will have to raise its loan loss reserves to $40 million to $45 million from $25 million.

Pulte's problem with bad loans stems partly from its acquisition of rival Centex in August 2009. Centex turned out to be riddled with badly underwritten loans, and Pulte has fully written down the goodwill associated with the deal. That means Centex is not generating enough money to justify what Pulte paid, analysts said.

``It was a mess when they bought it,'' said David Williams, an analyst at Williams Financial Group.

The company's results showed robust sales growth, analysts said. New home orders, a key sign of future sales, rose 27 percent to 4,544 homes, with average prices rising 6 percent to $279,000. The value of new orders rose 43 percent to $1.3 billion.

Dugas said the outlook for builders has swung 180 degrees from a year ago, when builder talk focused on incentives, discounts and distressed land.

Pulte reported strong growth in all of its 70 communities across 29 states. Demand is so strong, Dugas said, that the company has had trouble finding enough labor to build homes.

Third-quarter profit was $177 million, or $0.30 a share, compared with a net loss of $129 million, or $0.34 per share in the same quarter last year. The last time the company enjoyed such robust earnings was in the third quarter of 2006.

Home sales nationally have been picking up, thanks to record low interest rates, a slowing in foreclosure-related sales, and pent-up demand from buyers who have regained confidence after having watched the housing slump.

THREATS REMAIN

Still, threats remain to the home-building sector. U.S. median household incomes have been flat for 15 years, and unemployment, at 7.8 percent, remains high, which could prevent wages from rising much in the near term. In normal housing cycles, income and house prices move in lockstep.

``The middle class is getting more and more broke as the years go by,'' said FBN Securities analyst Joel Locker, who has an ``underperform'' rating on Pulte as well as on most builders.

There are signs that some renters are refraining from buying in the U.S. housing market. Equity Residential, one of the biggest apartment owners in America, said on a conference call Thursday that in urban areas, about 13 percent of the people moving out of its buildings are buying homes.

Typically, that figure is closer to 20 percent, according to Fred Tuomi, Equity's executive vice president of property management.

In the third quarter, price hikes helped improve Pulte's adjusted gross margins on home sales to 21.6 percent from 18.4 percent in the year-ago quarter. Margins also improved due to the company's efforts to contain costs through substitution of cheaper materials in place of more expensive ones.

For the quarter, Pulte said revenue rose 12 percent to $1.23 billion, below analysts' expectations of $1.41 billion, according to Thomson Reuters I/B/E/S.