Greed will get ya everytime

I was trying to hold my tongue, but I have to speak my piece on this PHM warning. I was quite struck by the following quote from their recent guidance:

“Pulte’s Las Vegas operations have raised prices aggressively, with some communities implementing price increases well above the 50% increases experienced in the broader Las Vegas market,” said Richard J. Dugas, Jr., President and Chief Executive Officer. “Consumer acceptance of these increases at certain price levels has apparently reached a ceiling, suggesting that prices have become higher than what the market will support. Pulte has already implemented actions to lower local market pricing to better align the Company’s operations with current market conditions.”

Now, we all know that the miracle of capitalism is that profits come from charging what the market will bear, but it seems to me that Pulte got a bit greedy here. I have read euphamisms like “Pulte got overly aggressive,” but let’s call this for what it really is. Pulte finally got caught with its hand in the cookie jar one too many times.

This over-reaching is understandable. Throughout this current housing boom, the companies in this sector have tried to demonstrate that they are amazing growth machines deserving of premium valuations. (For example, listen to or read Hovanian’s [HOV]latest earnings call). But the market has generally remained stingy with its pennies. Depsite some amazing price runs, these stocks typically STILL sport single-digit P/E ratios. I can imagine the frustration of the insiders. They want to get rich like those tech stock guys who breathe hype and swim in luxury at the mere mention of 15% revenue growth and an extra penny of margins. (Again, refer to Hovanian). Alas, the insiders will have to settle for something less than tech stock riches and sell out before those puny valuations become quite justified.

If you need more evidence of the lengths to which these companies want to bask in the warm glow of growth, look no further than Pulte’s warning. Pulte takes great pains to cushion their warning with the sweet promises of future growth: “The Company experienced robust sales during the period in many of its markets including the West region, which showed an increase of 3 percent, despite weakness at certain price points within the Company’s Las Vegas operations.” and “‘Pulte is in position to deliver greater than 50% year-over-year growth in earnings per share,’ said Dugas. ‘These results, along with strong new order rates we are experiencing in most of our regions, should enable the Company to drive additional growth in 2005.’” I have also noted many analysts swooning to the siren song and cheerfully noting that this warning is both company-specific and market-specific. Indeed, the house party continues all across the country. Funny, I seem to remember how the semiconductor boom crashed right after we heard of one company-specific problem after another. I guess this time is different?

All this is not to say that the housing boom is about to crash and crumble. This debate has been worn thinner than NetFlix’s profit margins. Notice I am even trying to be “economically correct” and “Fed friendly” by calling this a boom and not a bu**le. I more mention this whole drama because I think we should all take notice and alarm when the scourge of greed shows itself in plain view on a company’s financial statements. The subsequent scenes to these storylines usually get uglier and uglier as we find that the infection has spread through more of the industry than anyone was ready to admit. And surely noone needs a reminder of what unchecked greed does in our financial markets?

The fact that Vegas was quick to discipline Pulte (no more than 50% annual price increases for these level-headed folks!) is a small reassuring sign that some amount of rationality still exists out there…that the checks and balances still have a heartbeat – faint as it might be…or maybe we are simply witnessing the monopoly funny money running the beginning of its last laps. Well, for potential clues, keep your eye on gold. Looks like it could be poised for yet another break-out…slowly..but..surely….

Be careful out there!