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PulteGroup Slides 11% in a Month: Buy PHM Stock on the Dip?
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PulteGroup, Inc. (PHM - Free Report) shares, like other builders, have pulled back slightly in recent times, given concerns over mortgage rates. PHM shares have lost 11% in the past month amid a challenging borrowing costs landscape.
Even shares of a few prominent players in the industry like D.R. Horton (DHI - Free Report) , Lennar (LEN - Free Report) and Toll Brothers (TOL - Free Report) have lost 8.4%, 11.2% and 8.2%, respectively, in the past month. The Zacks Building Products - Home Builders industry has declined 5%. However, the S&P 500 Index has risen 3.4% in the same time frame.
Although mortgage rates continue to hammer the industry, PulteGroup has been benefiting from a cyclically resilient operating model, effective pricing strategy and mortgage rate buydown program.
PulteGroup's first-quarter 2024 results highlighted its robust ability to thrive in a prolonged high-rate environment. Despite market volatility, the company achieved a 14% year-over-year increase in net orders, raised net pricing in approximately half of its communities, and set a new company record for first-quarter gross margins at 29.6% (compared to guidance of 28% to 28.5%).
Balanced Operating Model
PulteGroup is effectively managing a balance between spec (speculative) and build-to-order approaches to drive growth by maintaining a strategic mix and responding to market conditions. The company is closely monitoring market conditions and adjusting its strategy accordingly. This responsiveness ensures that it can adapt to changes in demand, particularly in a fluctuating economic environment.
PulteGroup maintains a 50/50 balance between build-to-order and spec sales. This balance allows it to cater to different segments of the market, ensuring it can meet immediate demand with spec homes while also accommodating buyers who prefer to customize their homes with build-to-order options. PulteGroup tailors its approach based on the brand. For instance, Centex predominantly focuses on spec homes, while Pulte and Del Webb are more inclined toward a build-to-order approach. This differentiation helps the company target various buyer preferences and market segments effectively.
Precisely, in times of higher interest rates, having spec homes allows PulteGroup to offer powerful incentives, such as forward mortgage rate commitments. These incentives can be more effectively applied to spec inventory, making it more attractive to buyers who are concerned about rising interest rates.
By balancing spec and build-to-order homes, PulteGroup is able to address diverse buyer needs, remain flexible in response to market conditions, and leverage operational efficiencies to drive growth.
Mortgage Rate Buydown Program
PulteGroup is benefiting from its mortgage rate buydown program by increasing home sales. By offering 30-year fixed-rate mortgages at around 5.75% and even lower in a few markets — significantly lower than the current rate of more than 6.5% — the company makes home purchases more affordable for buyers. This initiative has been utilized by approximately 25% of its buyers, driving demand and maintaining a competitive sales pace. The program acts as a marketing tool to counteract high mortgage rates, easing borrowers into their full mortgage payments and enhancing PulteGroup's market appeal and sales performance.
Effective Pricing
Management highlighted that almost all of its markets displayed pricing dynamics that were stable or improving in the first quarter of 2024. This allowed PHM to raise net pricing in more than half of its communities. Net pricing in the quarter across many of its markets increased between 1% and 5%.
Meanwhile, the company chose not to lower its prices in the fourth quarter of 2023 despite the slow start in demand. Instead, PulteGroup held its pricing and pushed incentives, which allowed it to have more inventory available for the 2024 spring selling season. As demand improved, the company was able to sell and close more homes in the first quarter of 2024 at higher margins. This strategic decision to maintain pricing resulted in higher closing volumes and better net pricing, leading to gross margins above its guidance.
Right Time to Buy PHM?
From the industry perspective, high borrowing costs are currently hindering home sales and builder sentiment, creating a challenging environment for housing investments. However, a significant shortfall of new and existing homes has resulted from over a decade of under-building relative to population growth. Low housing inventory, strong employment figures, a desire for homeownership, and favorable demographic trends are expected to drive growth in the homebuilding market.
For PHM, the Zacks Consensus Estimate has moved north over the past 60 days as analysts increased their estimates, depicting optimism over the stock’s growth potential. Over the said time frame, the Zacks Consensus Estimate for second-quarter 2024 earnings per share (EPS) has increased to $3.20 from $3.18. This bullish trend justifies the stock’s addition to investors’ portfolios. This homebuilder has a long-term EPS growth rate of 17.7%, which highlights its inherent strength.
EPS Movement Chart
Image Source: Zacks Investment Research
Moreover, with a forward 12-month price-to-earnings ratio of 8.1X, slightly below the industry average of 9.5X, the stock presents a potentially attractive valuation for investors seeking exposure to the housing industry.
Again, PulteGroup’s trailing 12-month ROE is indicative of its growth potential. ROE for the trailing 12 months is 25.8%, much higher than the industry’s 16.8%, reflecting the company’s efficient usage of shareholders’ funds.
PulteGroup also has been paying quarterly dividends for nearly four decades. It has been consistently focusing on sharing its cash flows with shareholders and maintaining a solid financial position. In November 2023, it announced a quarterly dividend hike of 5% to 20 cents per share. This was paid on Jan 3, 2024, to shareholders of record at the close of business on Dec 19, 2023. We believe that PHM will achieve significant cash flow benefits this year by reducing construction cycle times from the current 128 days to a targeted 100 days.
The stock’s Zacks Rank #2 (Buy) suggests a potential upside given its strong operating model, effective incentive packages, and sound pricing strategy. We expect PHM to generate substantial returns and another $2 billion in operating cash flow in 2024. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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PulteGroup Slides 11% in a Month: Buy PHM Stock on the Dip?
PulteGroup, Inc. (PHM - Free Report) shares, like other builders, have pulled back slightly in recent times, given concerns over mortgage rates. PHM shares have lost 11% in the past month amid a challenging borrowing costs landscape.
Even shares of a few prominent players in the industry like D.R. Horton (DHI - Free Report) , Lennar (LEN - Free Report) and Toll Brothers (TOL - Free Report) have lost 8.4%, 11.2% and 8.2%, respectively, in the past month. The Zacks Building Products - Home Builders industry has declined 5%. However, the S&P 500 Index has risen 3.4% in the same time frame.
Although mortgage rates continue to hammer the industry, PulteGroup has been benefiting from a cyclically resilient operating model, effective pricing strategy and mortgage rate buydown program.
PulteGroup's first-quarter 2024 results highlighted its robust ability to thrive in a prolonged high-rate environment. Despite market volatility, the company achieved a 14% year-over-year increase in net orders, raised net pricing in approximately half of its communities, and set a new company record for first-quarter gross margins at 29.6% (compared to guidance of 28% to 28.5%).
Balanced Operating Model
PulteGroup is effectively managing a balance between spec (speculative) and build-to-order approaches to drive growth by maintaining a strategic mix and responding to market conditions. The company is closely monitoring market conditions and adjusting its strategy accordingly. This responsiveness ensures that it can adapt to changes in demand, particularly in a fluctuating economic environment.
PulteGroup maintains a 50/50 balance between build-to-order and spec sales. This balance allows it to cater to different segments of the market, ensuring it can meet immediate demand with spec homes while also accommodating buyers who prefer to customize their homes with build-to-order options. PulteGroup tailors its approach based on the brand. For instance, Centex predominantly focuses on spec homes, while Pulte and Del Webb are more inclined toward a build-to-order approach. This differentiation helps the company target various buyer preferences and market segments effectively.
Precisely, in times of higher interest rates, having spec homes allows PulteGroup to offer powerful incentives, such as forward mortgage rate commitments. These incentives can be more effectively applied to spec inventory, making it more attractive to buyers who are concerned about rising interest rates.
By balancing spec and build-to-order homes, PulteGroup is able to address diverse buyer needs, remain flexible in response to market conditions, and leverage operational efficiencies to drive growth.
Mortgage Rate Buydown Program
PulteGroup is benefiting from its mortgage rate buydown program by increasing home sales. By offering 30-year fixed-rate mortgages at around 5.75% and even lower in a few markets — significantly lower than the current rate of more than 6.5% — the company makes home purchases more affordable for buyers. This initiative has been utilized by approximately 25% of its buyers, driving demand and maintaining a competitive sales pace. The program acts as a marketing tool to counteract high mortgage rates, easing borrowers into their full mortgage payments and enhancing PulteGroup's market appeal and sales performance.
Effective Pricing
Management highlighted that almost all of its markets displayed pricing dynamics that were stable or improving in the first quarter of 2024. This allowed PHM to raise net pricing in more than half of its communities. Net pricing in the quarter across many of its markets increased between 1% and 5%.
Meanwhile, the company chose not to lower its prices in the fourth quarter of 2023 despite the slow start in demand. Instead, PulteGroup held its pricing and pushed incentives, which allowed it to have more inventory available for the 2024 spring selling season. As demand improved, the company was able to sell and close more homes in the first quarter of 2024 at higher margins. This strategic decision to maintain pricing resulted in higher closing volumes and better net pricing, leading to gross margins above its guidance.
Right Time to Buy PHM?
From the industry perspective, high borrowing costs are currently hindering home sales and builder sentiment, creating a challenging environment for housing investments. However, a significant shortfall of new and existing homes has resulted from over a decade of under-building relative to population growth. Low housing inventory, strong employment figures, a desire for homeownership, and favorable demographic trends are expected to drive growth in the homebuilding market.
For PHM, the Zacks Consensus Estimate has moved north over the past 60 days as analysts increased their estimates, depicting optimism over the stock’s growth potential. Over the said time frame, the Zacks Consensus Estimate for second-quarter 2024 earnings per share (EPS) has increased to $3.20 from $3.18. This bullish trend justifies the stock’s addition to investors’ portfolios. This homebuilder has a long-term EPS growth rate of 17.7%, which highlights its inherent strength.
EPS Movement Chart
Image Source: Zacks Investment Research
Moreover, with a forward 12-month price-to-earnings ratio of 8.1X, slightly below the industry average of 9.5X, the stock presents a potentially attractive valuation for investors seeking exposure to the housing industry.
Again, PulteGroup’s trailing 12-month ROE is indicative of its growth potential. ROE for the trailing 12 months is 25.8%, much higher than the industry’s 16.8%, reflecting the company’s efficient usage of shareholders’ funds.
PulteGroup also has been paying quarterly dividends for nearly four decades. It has been consistently focusing on sharing its cash flows with shareholders and maintaining a solid financial position. In November 2023, it announced a quarterly dividend hike of 5% to 20 cents per share. This was paid on Jan 3, 2024, to shareholders of record at the close of business on Dec 19, 2023. We believe that PHM will achieve significant cash flow benefits this year by reducing construction cycle times from the current 128 days to a targeted 100 days.
The stock’s Zacks Rank #2 (Buy) suggests a potential upside given its strong operating model, effective incentive packages, and sound pricing strategy. We expect PHM to generate substantial returns and another $2 billion in operating cash flow in 2024. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.