Profits Build at Pulte, M/I Homes

Both homebuilders easily beat Wall Street's estimates.
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Updated from Feb. 1

Pulte Homes

(PHM) - Get Report

, the country's second-largest homebuilder by market cap, reported a 28% increase in fourth-quarter earnings and said new orders grew by 10%.

The Bloomfield Hills, Mich.-based builder posted fourth-quarter earnings from continuing operations of $531.7 million, $2.03 a share, compared with $415.2 million, or $1.59 a share, a year earlier. Analysts expected earnings of $1.98 a share, according to First Call.

Including all items, Pulte's net income rose to $574.6 million, or $2.19 a share, from $397.4 million, or $1.52 a share.

Revenue increased 24% to $5.08 billion in the quarter, in line with the analyst target.

Pulte maintained its 2006 EPS guidance of $6 to $6.25, which brackets Wall Street's mean estimates of $6.16.

Pulte shares rose 33 cents to trade at $39.19 Thursday.

Also on Thursday, shares of

M/I Homes

(MHO) - Get Report

, a small-cap homebuilder, surged more than 15% after the company reported a 68% growth in fourth-quarter earnings, crushing analyst estimates. M/I Home said the strong results were mostly due to a 140-basis point boost in gross margins.

At Pulte, new orders grew 10% to 9,821 units in the quarter. Growth was strongest in the central region of the U.S., where orders jumped 45%. Orders rose 18% in the West and 16% in the Midwest, but fell 12% in the Southeast and 10% in the Northeast.

"The order number was better than I expected," says AG Edwards analyst Greg Gieber, who rates the company buy. "I expected something in the mid-single digits." AG Edwards provides no investment banking services to Pulte.

However, other analysts had Pulte's order growth pegged at 20% or higher.

On its call earnings Thursday, Pulte's management echoed other builders' recent comments that the Northern California and Washington, D.C./Northern Virginia markets have been weak because of high prices. As well, the greater D.C. area is seeing a lot of resale inventory, which is hurting new-home sales, management said.

The company was asked by analysts how it could possibly compete with a builder like

Centex

(CTX)

, which has been offering discounts of $100,000 on certain homes in these markets, sometimes as part of one-day-sales drives.

"Offering incentives like that is currently not in our game plan," Steven Petruska, Pulte's chief operating officer, said on the call.

"We like our positions

in the D.C./Virginia market. Our positions are not the same positions that some of the builders are discounting at a much higher price point than us," Petruska said.

He also said that because Pulte didn't aggressively raise prices, it doesn't need to offer bigger incentives, even in slowing markets.

Petruska pegged Florida as "probably the strongest housing state in the country" and said Pulte's 12% order drop in the Southeast was mostly due to a 20% drop in community count in Tampa, where new communities will be opening this year.

He added that Texas, Southern California, and Nevada remained strong markets.

The company expects its community count to grow 10% in 2006, but admitted that home openings could be delayed for the important spring selling season because of a slow process in gaining rights to the land.

Pulte's backlog of homes sold but not yet booked as revenue rose 22% to $6.3 billion at the end of 2005, compared with $5.15 billion at the end of 2004.

Pulte also said its board approved a new $200 million share-buyback program. The company repurchased $102 million of stock during the fourth quarter.

Robert Marcin, general partner of Defiance Asset Management and a

RealMoney.com

columnist who is very bullish on builders, was impressed with the order growth at Pulte.

Marcin says Pulte's ability to achieve double-digit unit order growth and a 24% rise in the dollar value of orders shows that the company has the market share and land position to outgrow the industry in what is now a "soggy path" for homebuilders.

Meanwhile, M/I Homes said its fourth-quarter earnings rose to $41.3 million, or $2.84 a share, from $24.5 million, or $1.70 a share, a year earlier. Analysts expected earnings of $2.54 a share. The Columbus, Ohio, builder's shares recently gained $5.97 to $44.96.