Heavy call buying was detected in PHM stock on July 24, 2020.

Make sure to review this lesson on options trading so you understand the above image.

Heavy call buying was detected in Pulte Homes on Friday, July 24, 2020. There was 17k calls trading versus 800 puts, and activity was concentrated at the August $48 strike where repeat sweep buyers have paid 35 to 75c for a total of 14k contracts.

RBC Capital analyst Mike Dahl raised the firm’s price target on PulteGroup to $44 from $39 and keeps a Sector Perform rating on the shares. The analyst notes the company’s Q2 earnings beat with stronger expected orders and margins. Dahl further cites the management’s commentary and guidance reflected a “supply constrained market”, with higher pricing power as the biggest potential upside driver.

Raymond James analyst Buck Horne upgraded PulteGroup to Outperform from Market Perform with a $48 price target. Horne says the housing recovery since April’s shutdowns has been nothing short of extraordinary and expects to hear even more news of record new home demand in June. For Pulte specifically, Horne says the turnaround from April’s -53% y/y order tally to June’s +50% surge also shows evidence that the recovery is now extending up the value chain and across buyer segments, in addition to increasing first-time buyer demand.

On July 23, 2020, PulteGroup, Inc. (NYSE: PHM) announced financial results for its second quarter ended June 30, 2020. PulteGroup reported Q2 adjusted EPS of $1.15 versus the consensus estimate of 87c. The company reported Q2 revenue of $2.59B versus the consensus estimate of $2.51B.

“Following a period of demand weakness beginning in late March and into April as COVID-19 first impacted the country, new home sales experienced a material acceleration as the second quarter progressed,” said Ryan Marshall, President and Chief Executive Officer of PulteGroup. “The recovery in demand reflects a number of factors, including: low interest rates, a restricted supply of existing-home inventory, pent-up demand following the economic shutdown, the appeal of single-family living in a new home and a desire among some buyers to exit more densely populated urban centers.”

“By effectively adjusting our business practices to the rapidly changing market dynamics caused by COVID-19, PulteGroup realized a 34% increase in adjusted earnings per share and generated strong cash flows in the current quarter. With industry leading gross margins, a backlog valued at $5.8 billion and $1.7 billion of cash on hand, the Company is well positioned to navigate current market conditions.”

Home sale revenues for the second quarter increased 3% over the prior year to $2.5 billion. Higher revenues for the quarter reflect a 6% increase in closings to 5,937 homes, partially offset by a 3% decrease in average sales price to $416,000. The lower average sales price for the period primarily reflects an ongoing shift in the Company’s product mix to include more first-time buyer homes which typically carry a lower sales price.

Gross margin for the second quarter was 23.9%, which represents an increase of 80 basis points over the second quarter of the prior year and is up 20 basis points from the first quarter of 2020. Reported SG&A expense for the quarter of $197 million, or 8.0% of home sale revenues, included the $61 million pre-tax insurance benefit and the $10 million pre-tax severance charges. Excluding these items, the Company’s adjusted SG&A expense for the quarter was $247 million, or 10.0% of home sale revenues. Prior year SG&A expense for the second quarter was $259 million, or 10.8% of home sale revenues.

Net new orders for the second quarter decreased 4% from the prior year to 6,522 homes. The dollar value of net new orders was $2.7 billion, or an average sales price of $410,000, which is down from $426,000 last year. The lower average selling price reflects the Company’s ongoing efforts to expand its sales among first-time buyers. For the quarter, the Company operated out of an average of 887 communities.

Unit backlog at the end of the quarter totaled 13,214 homes, which is an increase of 12%, or 1,421 homes, over the prior year backlog of 11,793 homes. The total value of homes in backlog of $5.8 billion, an increase of 13% over last year, reflects a favorable geographic and product mix of homes to be closed.

Second quarter pre-tax income for the Company’s financial services operations was $60 million, which represents an increase of 141% over prior year second quarter pre-tax income of $25 million. The increase in pre-tax income for the period reflects a strong margin environment, higher loan volumes resulting from growth in the Company’s homebuilding operations, and a higher mortgage capture rate. Our mortgage capture rate for the second quarter increased to 87% from 81% last year.

For the quarter, the Company reported $108 million of income tax expense, representing an effective tax rate of 23.7%.

In the second quarter, the Company elected to repay $700 million that had been borrowed on its revolving credit facility in March of 2020 as a precautionary action at the start of the COVID-19 pandemic. As previously announced, the Company has suspended its share repurchase activities given uncertainties created by COVID-19.

In conjunction with announcing its second quarter financial results, the Company also provided the following update on the impact of the COVID-19 pandemic on housing demand and its overall operations:

“After a period during which we elected to close our sales centers and leverage multiple technologies to sell remotely, all of our communities are now reopened to walk-in traffic with sales staff working on-site,” said Mr. Marshall. “Our Financial Services teams also adapted their business practices to operate remotely and continue to do so currently. Our construction and manufacturing operations were deemed essential services in all but a handful of markets, so we incurred only limited production disruptions in the second quarter and are now operating at effectively full capacity in all markets. In response to the ongoing risks relating to the pandemic, all of our teams are working under enhanced safety protocols designed to protect the health of our employees, customers and trade partners.”

“PulteGroup was in a strong financial position at the start of this health crisis, but given the risks of severe economic impact we moved quickly to protect our overall liquidity and financial flexibility. Our actions included: reducing controllable expenditures, tightly managing investment in the business, drawing $700 million on our revolver, and suspending share repurchase activity. These actions, coupled with the improving operations we experienced through the quarter, resulted in strong free cash flow generation in the quarter. As a result, our cash balance at the end of the second quarter was $1.7 billion, after having repaid the $700 million we borrowed under our revolver.”

“New home demand has clearly rebounded, but we continue to take a disciplined approach to our business given the ongoing spread of the coronavirus. As a result, we are gradually increasing our land acquisition and development spend to help ensure future lot availability. We are also increasing our start cadence and related investment in house inventory, while continuing to expand our offering of first-time buyer product to meet the growing demand for more affordably priced homes. We have also recalled the majority of furloughed employees and may rehire additional staff as the recovery continues to unfold.”

“Given the strength of second quarter sales, we are encouraged about the back half of 2020 and plan to provide guidance for the remainder of the year as part of our second quarter earnings call.”

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