Homebuilder Pain Spreads

The company experienced a 270-basis-point decline in its gross margin to 21.1% in the second quarter, partially dragged down by a $62 million write-off resulting from adjustments to land inventory and land held for sale. This charge includes the write-off of option deposits and preacquisition costs association with land transactions the company no longer plans to pursue.

Beazer, as well, recorded an $11 million pretax charge to write off land options in its second quarter.

Pulte said it has already scaled back its lot position by 10% since the end of 2005. This strategy could result in Pulte generating $500 million of free cash flow by the end of the year, management said. Incidentally, Centex predicted the same number in its call Tuesday.

In past years, builders generally have been cash-flow negative as they used almost every dollar of profit for land purchases.

Assuming flat to declining inventories next year, Pulte said its entire net income could be free cash flow in 2007, although the company didn't provided a profit estimate. Free cash flow will be allocated more toward share buybacks than land, Pulte said -- again echoing similar comments from D.R. Horton and Centex.

Pulte shares recently were up 23 cents, or 0.8%, to $30.28. Beazer shares were up 10 cents, or 0.3%, to $40.61.

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