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PulteGroup (PHM) Slashes Costs on Weak Net Order Growth

Zacks Equity Research

PulteGroup, Inc. PHM has been undertaking initiatives to reduce targeted overhead expense as net new orders for April declined significantly from the year-ago period.

Delving Deeper

While providing an update on actions taken by the company in response to the COVID-19 pandemic, PulteGroup revealed that the company is cutting costs through a combination of layoffs, furloughs and other cost-cutting initiatives in the wake of weak demand for homes.

Nonetheless, it highlighted the fact that although housing demand contracted initially, the recent sales trends are encouraging. Its weekly net new orders increased from 140 homes in the last week of March to 400 in the final full week of April that ended on May 3. Although order rates have increased, net new orders for April were down 50% from the prior year.

Resultantly, these cost-cutting initiatives are expected to slash overhead expenses by $100 million on an annualized basis, of which approximately $65 million will be realized over the remainder of 2020.

Moreover, the company expects to incur a charge of approximately $10 million for severance and related costs in second-quarter 2020 due to the above-mentioned actions.

Q1 Recall

PulteGroup reported first-quarter 2020 results, wherein earnings surpassed the Zacks Consensus Estimate but revenues lagged the same. Earnings and revenues grew 25.4% and 14.9% year over year, respectively, which is reflective of a strong housing market before the COVID outbreak. Higher demand owing to favorable housing dynamics in most part of the quarter, backed by lower interest rates and improved affordability, had a positive impact on PulteGroup’s performance.

However, of late, housing demand is undoubtedly under pressure from job losses, a tighter credit market and slower resale market as a result of the pandemic. Supply chain disruptions to restrict the virus spread are also putting pressure on housing supply. Overall, a significant rise in unemployment as a result of the coronavirus pandemic and its accompanying stay-at-home orders will restrict many Americans’ ability to a purchase a home in the near term.

Fannie Mae, in a recently released report, projects that home sales will drop nearly 15% in 2020. This is mainly due to a downturn in existing home sales, which, per Fannie Mae, are expected to drop to an annual rate of 4.54 million units from 5.34 million in 2019.

Share Price Performance

Shares of this homebuilding company — which currently carries a Zacks Rank #4 (Sell) — have declined 27.6% in the year-to-date period compared with the Zacks Building Products - Home Builders industry’s 19% fall.

You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

Discouragingly, coronavirus woes, and imminent recession and layoffs resulting from the same are anticipated to dent the housing market — which includes notable names like Lennar LEN, D.R. Horton DHI and KB Home KBH — in the near term. Nonetheless, many economists are of the opinion that when the worst of the COVID-19 economic downturn is behind us, the housing market is expected to rebound, which might aid in bringing the rest of the economy out of the doldrums.

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