With that being said, if you look at PulteGroup, they have the second lowest debt-to-equity ratio at 1.10 compared to a debt-to-equity of 0.73 at Toll Brothers Inc (NYSE:TOL). By comparison, Lennar Corporation (NYSE:LEN)’s debt-to-equity looks fairly reasonable at 1.37, but KB Home (NYSE:KBH)’s debt-to-equity could be problematic at 4.13. As you can see, whether we look at margins, expense management, or debt-to-equity, PulteGroup is reporting impressive results.
Too Bad You Can’t Trust These Results
There is little question that PulteGroup is performing well, and when it comes to their backlog growth, the company looks impressive as well. There is just one big problem with PulteGroup’s backlog growth, no one really knows if these contracts will be finalized.
If anyone doubts the growth in the housing sector, you only have to look at the backlog growth reported by these four major homebuilders. Lennar Corporation (NYSE:LEN) reported the strongest overall growth with 55% unit growth. Toll Brothers Inc (NYSE:TOL) reported the second best growth with a 52% increase, and in third place, PulteGroup reported 35% unit growth. In last place of this group, KB Home (NYSE:KBH) seems to be falling behind their peers with just 6% unit growth. However, these numbers change a bit once you include the cancellation rate at each company.
When you adjust unit growth for the cancellation rate at each company, take a look at how the unit growth at each company changes.
| Name | Unit Growth Before | Cancellation Rate | Unit Growth After |
|---|---|---|---|
| KB Home | 6% | 27% | 4.38% |
| Lennar | 55% | 14% | 47.3% |
| PulteGroup | 35% | ?? | ?? |
| Toll Brothers | 52% | 3.4% | 50.23% |
As you can see, though, Lennar looks like the leader without accounting for their cancellation rate; with this adjustment, Toll Brothers is the clear leader. The challenge of course for investors is, what is PulteGroup’s real backlog growth?
With a 35% growth rate without a cancellation, the company already comes in second to last. If the company’s cancellation rate is relatively small, investors can believe in this future growth. However, if PulteGroup has a cancellation rate of 14% like Lennar, their unit growth drops to 30.1%. While this still sounds good, with better options available, investors might stay away.
The bottom-line is, though analysts expect 42.77% growth in earnings from PulteGroup over the next few years, Toll Brothers is expected to grow faster at over 62%. The fact that Toll Brothers has such a small cancellation rate, and is straightforward in reporting their results, would seem to make Toll the better option. Unless PulteGroup is willing to report their cancellation rate each quarter and come clean to investors, I would suggest investors avoid the shares in favor of their competition.
Chad Henage has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Chad is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article The Great Unanswered Question originally appeared on Fool.com is written by Chad Henage.
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