Check Out of Downtrending PulteGroup

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PulteGroup (PHM) is one of the largest homebuilders in the U.S. and offers its products through the Pulte Homes, Del Webb and Centex brands. PulteGroup separates its customers into entry-level, move-up and active adult.

PulteGroup Inc. (NYSE: PHM)The Centex brand focuses on the entry-level buyer and accounts for 25% of closings, Pulte Homes focuses on move-up buyers and accounts for 46% of closings and Del Webb focuses on active adult buyers and accounts for 29% of closings. PulteGroup had operations in 48 markets throughout 27 states segmented into six geographic reporting segments. As of June 30, 2014, PulteGroup had 589 active home communities with an average selling price of $328,000.

In response to the 2008 recession, PulteGroup posted significant losses and restructured operations, decreasing headcount and overhead costs and minimizing cash spend to increase cash reserves and pay down debt. Starting in 2012, new home sales began to increase with PulteGroup returning to profitability in 2012.

The U.S. housing industry is very fragmented and highly competitive with PulteGroup controlling only a 4% market share as of 2013. In each market that PulteGroup competes in, there are numerous public and private national, regional and local homebuilders.

In addition, new home sales have historically made up only 15% of total home sales. So, PulteGroup’s brands also compete against existing homes for sale or rent. Home sales are also highly seasonable, causing significant swings in volume, profitability and cash flow throughout the year.

To support home sales, PulteGroup owns a captive financial services business that provides mortgage and title services to its customers. On average, PulteGroup finances over 60% of its homes for sale through its subsidiary. PulteGroup utilizes warehouse lines of credit and sell all loans and servicing in the secondary markets within 30 days or less.

PulteGroup’s go-forward business strategy is to increase inventory turns; allocate capital using a risk-based portfolio approach; establish clear product offerings to PulteGroup’s target audiences in order to optimize pricing and decrease reliance on speculative home sales; reducing building costs and maintaining an efficient overhead structure.

PHM – Earnings Summary

PulteGroup started 2014 with great momentum coming off the fourth quarter of 2013 reporting a profit of $220.1 million, up from $58.7 million a year earlier, and revenues of $1.66 billion, up 5.6%. This momentum helped bolster its stock price through the end of February. The luster began to come off the stock in March with Credit Suisse (CS) and Barclays (BCS) downgrading the stock due to anticipated slowing demand.

PulteGroup’s first quarter validated analyst assumptions and it reported that earnings fell 8.5% due to fewer new orders and a higher tax rate caused by deferred tax expenses related to state income taxes. For the first quarter, PulteGroup’s new orders fell 6% and closings 10% producing a profit of $74.8 million, down from $81.8 million the year prior. Total revenue declined 3.8% to $1.12 billion.

PulteGroup’s second quarter earnings showed improvement with higher revenue driven by higher sales prices. New orders fell by 2.2%, but the value of those orders increased 5%. Earnings for the quarter were $41.9 million, up from $36.4 million the previous year on revenues of $1.29 billion, up 0.5%, both missing analyst consensus estimates that has continued to drive the stock price lower.

PHM – To Good to be True Valuation

PulteGroup’s current price-to-earnings ratio of 2.61 does not makes sense compared to an industry average of 8.3 and the S&P 500‘s P/E of 18.7. Even with this relatively low valuation, PulteGroup’s price/earnings-to-growth is at 1.95, representing a possible overvaluation given its growth prospects.

With a current trading range in the high teens, analysts have a consensuses 12-month price target of $22. If PHM stock price can reach it, that would be a gain of nearly 30% in 12 months. PulteGroup offers a current dividend yield of 1.1% to help ease the risk of holding, but with recent analyst downgrades, PHM stock trading below its 50-day and 200-day moving average and a year-to-date of negative 12%, the trend is clearly in the downward direction. Hold with caution, sell if you got ’em is my opinion.

PulteGroup

Source: www.nasdaq.com

  As of this writing, Kenneth Fick did not hold a position in any of the aforementioned securities. Write him at kfick@piercethefog.com or follow him on his blog at www.piercethefog.com

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