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Pulte Is As Busy As Its Customers


It's 8:15 on a sunny Friday morning in Surprise, Ariz., and neighbors Elaine Cooper and Judy Ryan have just wrapped up a one-hour water-aerobics session -- their third this week. Later, Cooper plans a round of golf, while Ryan will take a two-hour collage class. "If you can't find anything to do here, you don't want to do anything," says Cooper, 69. "I'm busier now than I was when I was working."

Welcome to Sun City Grand, an 8,096-home development just outside Phoenix that sports golf courses, fitness facilities, and hobby and craft centers. It is one of Pulte Homes Inc.'s (PHM) 19 so-called active-adult communities -- new housing for empty nesters who want more from their golden years than just bingo and shuffleboard. Pulte, now the nation's largest publicly held homebuilder -- No. 19 on the BW50 list -- is betting that an appeal to affluent retirees such as Ryan and Cooper will keep its profits vigorous, too.

Like other homebuilders, Bloomfield Hills (Mich.)-based Pulte has enjoyed phenomenal growth, thanks to the roaring economy of the 1990s and rock-bottom mortgage rates. Pulte, whose shares trade at about 95, also grew because of a $1.7 billion deal two years ago to buy Del Webb Corp., the major player in the active-adult segment. The result? Last year, sales jumped 39%, to $7.5 billion, while profits surged 51%, to $453.6 million. And U.S. single-family home starts remain surprisingly robust, jumping a seasonally adjusted 5.7% in October from September. It's no wonder, then, that Merrill Lynch & Co. (MER) analyst Joseph Sroka sees Pulte's earnings climbing to $604.8 million this year and $730.4 million in 2004.

A COOLING MARKET

But mortgage rates will undoubtedly rise as the economy improves, and the housing market will cool. Industry experts see the typical 30-year fixed-rate mortgage, at 5.8% in 2003, hitting 6.2% next year. While the National Association of Home Builders expects 1.45 million single-family housing starts this year, it also sees that number falling in 2004 and 2005. So 38-year-old Richard J. Dugas Jr., Pulte's CEO only since July, is already working hard to deal with a market that may have peaked.

Dugas, a PepsiCo (PEP) alumnus who joined Pulte in 1994, wants it to dominate the active-adult segment. Dugas plans 40 to 60 new active-adult communities over the next 12 to 18 months, entering new markets such as Atlanta and Detroit. The rationale: There are 43 million Americans over 55, and there should be nearly 80 million by 2020.

Those potential customers also have lots of cash, thanks to homes that have appreciated handsomely. Pulte says its active-adult home buyers have an average net worth of $750,000, while the average price of homes targeted to them is $250,000 to $300,000. "Even when there's a big increase in interest rates, you're insulated to a large degree," Dugas says. Pulte is mining this rich market far deeper than rivals. Active-adult communities total 37% of Pulte's sales, vs. 18% at $7.3 billion Lennar Corp. (LEN)

But building active-adult developments on a grand scale can tie up capital for a decade or more, so Pulte's new projects will be far smaller than Sun City Grand, a Del Webb project. Large developments can require $150 million in startup costs and take 10 to 15 years to build. The new ones, with 500 to 2,500 homes, should be built out in three to five years, with lower startup costs. "The large communities that Del Webb had were not very return-on-investment-friendly," says Dugas. In 2000, the year prior to buying Del Webb, Pulte's return on capital was 13.3%. This year, estimates J.P. Morgan Securities Inc. (JPM) analyst Michael Rehaut, it will dip to 12.7%, vs. 16.8% for Pulte's peers.

HEDGED BETS

Dugas is also counting on cost-cutting to help boost profits. At PepsiCo, he was in charge of plant operational efficiency and process improvement. He has brought those productivity-boosting skills to Pulte. Instead of making components at each site, for instance, Pulte has centralized production for some of them, such as wall panels. That can cut construction time by 20 to 30 days. It's just one way that Dugas expects to save $55 million this year.

Finally, along with its focus on cash-rich retirees, Dugas is hedging his bets. Pulte is the only builder with a meaningful presence in all major buying segments: first-time, move up, and active-adult. That gives it an edge in any market slump. "If you go to war, you want to have all kinds of weapons in your arsenal," says analyst Stephen S. Kim of Smith Barney (C). So far, Dugas has enjoyed the equivalent of a prosperous peace. But rising interest rates could quickly change that -- and put that arsenal to the test. By Stephanie Anderson Forest in Surprise, Ariz.


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