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3 Homebuilders Building on Solid Foundations

Despite analyst concerns, these homebuilders should do well in 2014

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Homebuilders to Buy: PulteGroup (PHM)

homebuilders-homebuilder-stocksKeyBanc analyst Kenneth Zener downgraded LEN stock from buy to hold in early March. At the same time, the analyst upgraded PulteGroup (PHM) from hold to buy citing its measured growth combined with an attractive valuation as reasons for buying PHM stock.

Zener believes “defensive” investors will find PulteGroup’s focus on “profitability over volume” very attractive at a time when gains in home prices are likely to slow considerably. For those not as confident about the near-term future of homebuilders, owning PHM stock could be the safest play at the moment.

Nothing in PHM’s 10-K jumps out at you when it comes to top-line revenue. Its average selling price increased 11% in 2013 to $305,000 while the number of closings increased by 1,261 units or 7.6%. The combination of these two numbers produced an increase in home sale revenue of $872 million or 19%.

While that home sale revenue is solid, its 430 basis point increase in adjusted home sale gross margin is what made the difference in 2013. In fact, its 23.2% home sale gross margin in the final quarter of 2013 was the highest it has been on a quarterly basis since 2005. This achievement allowed it to generate a pre-tax profit of $528 million in 2013, 187% higher than in 2012. As a result, it retired $461 million in debt and sits with a debt-to-capitalization rate of 31% compared to 53% at the end of 2012.

PulteGroup, as Zener describes, is a good bet if you’re not sure that 2014 will be a banner year for new home construction. Of the big homebuilders, PHM stock is the most conservatively financed of the bunch while its valuation (EV/EBITDA) is also the least expensive. For these two reasons, I would recommend PHM stock over both Lennar and KB Home.

As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.

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