The of Pulte Group, Inc - Case Study Example

?Financial Analysis: The Case of Pulte Group, Inc. CONTENTS 2 Introduction 3 Background of the company 4 Ratios and analysis 5 Analyzing liquidity 8 Analyzing debts 9 Analyzing profitability 9 Analyzing efficiency 13 Findings and conclusion 15 List of Tables and charts 18 Appendix 19 Works cited 22 Financial Analysis: The Case of Pulte Group Abstract Financial analysis has become an important tool for planning, short and long term programs, coordination and control, and presenting the company to stakeholders. It also presents a picture how the company is being operated, growth opportunities, and how it compares with others in the industry. Usually, stakeholders are interested for this kind of information for purposes of investment, credit, and businesses. Stakeholders are credit institutions, shareholders, suppliers, customers, employees, analysts, competitors, government institutions, and others. This paper analyzes Pulte Group as a case study of company analysis. The study is divided in two phases. First, an understanding of the company’s business, strategies and industry is presented to show relation of activities to its spending. Second part is a ratio analysis to understand the relationship of ratios from previous years for internal trends and ratios of other firms for external trends for comparison Financial Analysis: The case of Pulte Group, Inc. Introduction The importance of a financial analysis nowadays cannot be discounted because of its contributions to decision-making. As a guide to interested stakeholders, an Analysis of Pulte Group, Inc. is being done for the purpose of reviewing trends of financial performance of the company to find if there its strategies are consistent with their spending; and to know if the company measures up with competition. Comparing the company with competitors will give light as to the standing of the company. As this company is a publicly listed company, shareholders of the company are interested to know status of the company because of their personal interests of investments. Credit institutions and suppliers are likewise paying attention to its credibility due to risks involved in doing business with the company. Finally, the government, as the controller of institutions concerned with the implementations of SEC rules of submission of its annual Report, has to check compliance. The Analysis reviews company strategies in the first part of the study; then ratios are calculated for internal and external trends. Data used come from published Annual Report of the company, and published analysis of experts. Sources of financial information are the Financial Statements of the company published in Morning Star (2013) and Pulte’s Annual Report for 2011. Advice of Lermack, H.(2003) a professor in Philadelphia University in conducting financial analysis, was consulted in this study and used it as guide for comments. Background of the company Pulte Group is one of the largest homebuilders in the U.S. It was incorporated in 1987 and is a listed company in the stock exchange. Its strategies are divided into two operations: the homebuilding and financial services. Company operates in 3 brands: the Pulte Group Homes, Centex, and Del Webb. In homebuilding operations, strategies used are offering of single-family detached, townhouses, condominiums, and duplexes at different prices, options and amenities to its customers. Customers are segmented as to as to entry-level, move-up, and active level. Company also acquires land for construction of homes for sale to homebuyers. It employs realty as it sells parcel of land to third parties for development. In order to attract prospects, company advertises, use brochures, and displays. It has opened a website to facilitate views of products, sites, negotiations, and information. For financial operations, company has own financial services that include mortgage and title operations through Pulte Mortgage and other subsidiaries. As an originator of mortgages, it uses its own funds and borrowings in mortgage and title operations pursuant to a purchase agreement. Then the mortgage is sold to outside investors like banks and institutions. The servicing sales contract takes about 90 to 120 days for repayment (Reuters, 2013). As of December 2011, the company had delivered approximately 600,000 homes, and has offered homes for sale in 700 communities. Company presence is felt in 61 markets throughout 29 states. Approximately, 6.7 million people have visited its websites in 2011.(Reuters, 2013) Ratios and analysis Revenue and net income Shown below are the revenues and net income for 5 years of Pulte Group. It will be noted that revenue is inconsistent during the 5 years of review. It is observed that while there is big revenue in 2008, net income is negative (See Table 1 and Chart l). Interestingly, it has been able to recover and grow its revenues from $4,137B in 2011 to $4,850 in 2012. Decrease of revenue might be due to adjustment of selling price. The Accompanying Statements of the 2011 Annual Report stated selling price of home units had to be reduced due to the challenging industry conditions and a product mix of first-time buyers (Annual Report 2011, pdf. pp-33-35). Table 1. 5-years Revenue and net income 2008 2009 2010 2011 2012 Revenue 6829 4084 4569 4137 4820 Net income -1473 -1183 -1097 -210 206 Chart 1. 5 years Revenue and net income Growth rate Growth Rate is defined as the amount of increase that a specific variable has gained within a specific period and expressed as a percentage. Table 2. Growth rate Item 2008 2009 2010 2011 2012 Revenue 6829 4084 4569 4137 4820 Growth rate -35% 11.87 -9.45 16.51 5 year growth 11.84 Industry -16.9 Growth rate shows 16.51% in 2012, an increase from negative growth rate of -9.455% in 2011, a rate of 11.87% in 2010. Five year growth rate of the company is 11.84% while industry has -16.9%.(Daily Finance) Interestingly, the company is able to reduce its cost of goods sold from 88% to 84%. This brought up the a higher gross margin from 12% to 16%, and has contributed for the company’s gain from a gross profit loss in 2008 to an increase in 2012. Table 3. % of cost of goods sold to revenue Items 2008 2009 2010 2011 2012 cost of goods sold 7145 4658 4176 3641 4064 Revenue 6,289 4,084 4,569 4,137 4,820 % of cost of goods sold 1.136111 1.140548 0.913986 0.880106 0.843154 Gross margin Gross margin is the ratio of gross profit to revenue. It measures what proportion of the revenue is converted into gross profit. Its formula is: Gross margin= Gross profit / revenue. Gross margin is what is left for the company to spend on other costs and obligations; and the higher the percentage, the better for the company. Table 4. Gross Profit Margin 2008 2009 2010 2011 2012 Gross profit -855 -574 393 495 756 Sales rev. 6,289 4,084 4,569 4,137 4,820 Gross margin -13.5952 -14.0548 8.601445 11.96519 15.68465 Chart 2. Gross Profit Margin For two years, from 2008 to 2009, company operated on a negative gross margin, meaning, cost of goods sold had been high that company had to run on debts to operate. But since company was able to reduce its cost of goods sold, company was able to increase the gross margin. (see Chart 2) Analyzing liquidity This is a measure that shows the firm’s ability to convert liquid assets into cash quickly in order to meet maturing debts and obligations. Two ratios are used for this: the Current ratio and the Quick ratio. Decision rule for acceptable values are: 2:1 for current ratio and 1: for quick ratio. Current Ratio Formula: Current Assets divided by Current Liabilities. Only year 2012 will be assessed since it is intended to measure only short term obligations usually with terms of one year or shorter. TABLE 5. Current Ratio Current Assets 5,691 Current Liabilities 2,035 Current Ratio 2.80 A high ratio means the company will not default in short-term obligations. However, while keeping assets in cash, valuable opportunities for investment may be lost, since cash alone does not provide a return, only investment will. Current ratio obtained for the company is under an acceptable level. Quick Ratio Formula: Total Current assets- Inventory/Total Liability Table 6. Quick Assets Ratio Current Assets Inventory Total Current Liab. Quick Ratio 5691 4214 1477 2035 0.725799 In Quick Asset ratio, inventories are subtracted from total current assets, since they are the least liquid among the current assets, and it will take time to convert into cash. Since it is less than 1.0 company may have liquidity problems. Analyzing debts. Debt ratios will show how the firm manages its debts, whether it relies on debts to finance its investments and operations, and how well it manages its payments of debts. Companies will go bankrupt if it is unable to pay debts. On the other hand, debt benefits are tax incentives and borrowing allows business to grow. Debt to equity ratios This ratio shows firm’s degree of leverage, or its reliance on external sources to finance its operations. This is computed as: Debt to Equity Ratio = Total Debt / Total Equity Table 7. Debt to Equity Ratio Total Debts Total Equity D/E Industry 4,545 2,190 2.075 1.15* Figure used 2012 data. Industry source data: Daily Finance. 2013. D/E Ratio shows company relies more on debts to finance its operations. It is even higher compared to industry level. Debt to assets ratio: This measure shows the proportion of company’s asset financed by debts. If the ratio is less than one, most of the assets are financed through equity. If the ratio is more than one, most of the company’s assets are financed by debts It is calculated as: Total Debts / Total assets Table 8. Debt to assets ratio Total Debts Total Assets Debt to Asset Ratio Industry 4,545* 6,734 0.675 N/A *2012 figures It will be recalled from the Management’s Statement that the company’s marketing and financing strategy uses own funds and borrowings in its mortgage business model, so the high DOA is explainable. Industry comparison is not available. Analyzing Profitability For decision-making purposes, we want to know if profits are rising, whether sales are stable, or how the profits compare to the industry average, or other things that compare profitability of the company. Net profit margin Net profit margin is a tool that measures how much of the company’s revenues are kept as income. As shown in Table 9, company had a 4 year deficit on net income, that means company has no funds left for payment of other obligations. The 2012 Net profit margin of 4.28% of the company is the lowest among its competitors that has 9.15% for Henkel, AG and Procter & Gamble’s 13.71%. (Smart Money, 2012) It is calculated as: Net Profit Margin = Net income /Sales Revenue Table 9. Net profit margin 2008 2009 2010 2011 2012 net income -1,473 -1,183 -1,097 -210 206 sales rev. 6,289 4,084 4,569 4,137 4,820 NPR -0.23422 -0.28967 -0.2401 -0.05076 0.042739 % -23.4218 -28.9667 -24.0096 -5.07614 4.273859 Competitors* 9.15% Source: Smart Money. Competitive Analysis.2012. Data shows company operated on a negative profit margin, and only recovered in 2012. Low sales revenue according to the Management’s Statement is due to the unstable economy, the lowering of selling price of housing units and decreases in loans (Annual Report pp. 33-35). Competitors had higher net profit margin for 2012. Return on Assets This ratio provides an information as to how efficient is the company in using its assets to produce earnings. It is calculated as Profit after taxes / Total Assets Table 10. Return on Assets. 2012 figures. Profit after taxes Total Assets ROA Industry 206 6,734 3.06% 7.86% As shown, company’s Return on Assets is lower than industry’s competition. Return on Equity ROE This ratio is the amount of income returned as a percentage of shareholders equity. It measures how much profit a company generates with shareholders’ investment. Higher values are generally preferred because it means company is efficient in generating income. ROE is a useful measure in comparing with other companies in same industry and for analyzing historical data It is calculated as: Profit after taxes /shareholders equity Table 1l. Return on Equity (ROE) Profit after taxes Shareholders’ equity ROE Industry 2012 206 2, 190 10% 16.58% 2011 -210 1,939 -0.1083 2010 -1097 2,135 -0.51382 2009 -1,183 3,194 -0.37038 2008 -1,473 2,836 -0.51939 For 3 consecutive years, company turned out a negative ROE and recovered only in 2012. Industry’s ROE is still higher than Pulte’s. Negative ROE is the effect of decline of sales and revenue in prior years. Earning per share common share Earnings per share is the most important information shareholders wanted to know because it is the distributable profit which is allocated to each outstanding share. It is a very good measure of profitability especially when it is compared with competitors in the industry because it gives a picture of the earning power of the companies. This is computed as profit after taxes-Preferred Dividend / # of common shares outstanding Table 12. Earnings per share Profit after taxes # of outstanding common shares EPS Industry 2012 206 384,564 0.000536 N/A 2011 -210 379,877 -0.55281 2010 -1097 378,585 -0.0029 2009 -1183 300,179 -0.00394 2008 -1473 253,512 -0.00581 Due to decline in revenue and income, EPS have been negative for the past 4 years. Comparison with industry cannot be done due to unavailability of data. Analyzing Efficiency. These ratios show how well the firm’s assets are being managed. Inventory turnover – This ratio shows how fast the inventory is being sold. A high ratio means the firm is more efficient in managing inventories. Thus a ratio of 12 would mean inventory turns over 12 times, or the average inventory is sold in a month. Formula: Cost of goods sold/average inventory Chart No 3 shows inventory of Pulte Group. Adequate ratio cannot be obtained due to lack of information as to beginning balance of inventory. However, in order to compare it with industry, estimates of Daily Finance showed Inventory Turnover Ratio of Pulte is 0.9 while industry is 1.0. A low ratio shows inefficiency while a high ratio means strong sales. As a rule of thumb, “ is that if inventory turnover ratio multiply by gross profit margin (in percentage) is 100 percent or higher, then the average inventory is not too high” (CCD Consultants, 2009). Therefore: Ratio Turnover x gross profit margin = 0.9 x15.68 = 1.41 meaning the ratio is not too high. Chart 3. Inventory turnover of Pulte Group, 5 year period as related to CGS Total Assets Turnover – This ratio shows how much sales the firm generates for every dollar of investment in assets. For 2012, Asset turnover of the company is 0.70 which is higher than industry level of 0.60 Value Ratios P/E Ratios. These are ratios used by investors as a selection device before making investments which maybe subject to different interpretations. A high P/E Ratio may be considered over-pricing, while a low P/E could mean a poor track record. P/E ratio of the company as of 2012 is 38.60 (Daily Finance) while data for the industry is limited, thus determination if the ratio is overvalued or not cannot be established because of lack of information. Dividend Yields This is computed as annual dividends per share / current market price per share. The company has not declared any cash dividends for 2009 to 2011 while Daily Finance’ analyis shows industry has showed 0.7 dividend yields. Accordingly, its 5 years growth is nil. While industry also has suffered a negative dividends growth yield of -20.3%. Findings and conclusion The industry which the company is in is mostly affected by the economic crash and the burst of buble of housing in 2008 due to subprime home mortgages. This has adversely affected operations of the company as sales and revenues declined. Home mortgage is one of the business models of the company so that they have to adjust their prices in order to cope up. The five year review of the financial statements show a declining sales and negative net income. Strengths The ability to adjust strategies to match spending.The decision to reduce pricing is a marketing strategy that paid off as it was able to pull off to finally recover in 2012 as the FS would show. Negative sales growth is also experienced by the others in the industry that means a low sales is generic to the housing industry at this time. Liquidity is also one of its strengths because ratio tests showed company has enough assets to pay its maturing obligations on a short term. Inventory turnover is not too high, meaning their strategies in turning the tangible properties in cash is in proper perspective. Asset turnover is higher than the industry. Weaknesses Net profit margin is lowest among competitors. This is understandable because it has only recovered from a long period of negative nep profit. Return on Assets is lower than competitors. This matter should be given attention by management because this concerns efficiency in managing assets of the company. Assets of the company are houses, lands and mortgages for sale, and others. For four years, company had negative Earnings per share and a negative Return on Equity, and only started to declare it in 2012 as company started to recover. Likewise, no dividend yields are declared. Negative yields have been the same for all companies in the industry due probably perhaps by the prevailing industry problem. Conclusion Based on what I found out from the financial papers of the company and external sources, investing in housing industry is still risky. Investors have to wait until housing market stabilizes. However, if invetors are not averse to risks, the company is a good bet as it shows a recovering position in 2012. Tables and Charts List of Tables Table 1. 5 years revenue and net income 5 Table 2. Growth Rate 6 Table 3. % cost of goods sold to revenues 6 Table 4. Gross profit margin 7 Table 5. Current ratio 8 Table 6. Quick asset ratio 9 Table 7. Debts to Equity Ratio 9 Table 8 . Debts to Assets Ratio 10 Table 9. Net Profit Margin 11 Table 10. Return to Assets 11 Table 11. Return on Equity 12 Table 12. Earnings per share 13 List of Charts Chart 1 5 years Revenue and net income 5 Chart 2. Gross profit margin 7 Chart 3 . Inventory turnover 14 Appendix Financial Statements of Pulte Group. Inc, 5 year period Income Statement Balance Sheet Source: Morning Star.Pulte Group, Inc. Financials, 2013. Works cited CCD Conultants. Inventory Turnover Ratio Interpretation. 2009. Web. Daily Finance. Ratios, Pulte Group. Inc. Financial Ratios. 2013. Web. http://www.dailyfinance.com/quote/nyse/pultegroup-inc/phm/financial-ratios Lermack, H. B. Steps to a Basic Company Financial Analysis. 2003. Web. Pulte’s Annual Report, 2011, pdf. Pp. 33-35. Morning Star. Pulte Group Financials. 2013 http://financials.morningstar.com/income-statement/is.html?t=PHM®ion=USA&culture=en-us Reuters. Pulte Group Profile. 2013. Web. http://www.reuters.com/finance/stocks/companyProfile?symbol=PHM Smart Money. Competitive Analysis.2012. web. http://www.smartmoney.com/quote/phm/?story=competition Read More