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After 27% YTD Jump, Will Rate Cuts Push PulteGroup Stock to New Highs?
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PulteGroup, Inc. (PHM - Free Report) is gaining significant attention as markets anticipate a potential rate cut by the Federal Reserve in September. So far this year, the company’s shares have rallied 26.6%, demonstrating impressive resilience amid volatility and mixed industry data. This performance surpasses the Zacks Building Products - Home Builders industry’s 20.8% rise as well as the broader Construction sector's 13% increase and the Zacks S&P 500 Composite's 15.4% growth.
This Atlanta, GA-based homebuilder has strategically capitalized on key tailwinds such as flexible land portfolio and investment strategies, enhanced production efficiency, improved construction cycle times and lower lumber prices. The company's cyclically resilient operating model, effective pricing strategy and mortgage rate buydown program further position it for continued success.
Looking ahead, the anticipated rate cut in September could provide an additional boost to the housing market, further enhancing the outlook for homebuilders like PulteGroup, along with peers such as D.R. Horton (DHI - Free Report) , Lennar Corporation (LEN - Free Report) , and NVR, Inc. (NVR - Free Report) .
On Aug. 23, Federal Reserve chair Jerome Powell signaled a willingness to initiate interest rate cuts, expressing confidence that inflation is approaching the Fed's 2% target. In a speech at the Kansas City Fed's annual economic conference in Jackson Hole, WY, Powell stressed, "The time has come for policy to adjust."
In this scenario, with markets anticipating an interest rate cut by the Federal Open Market Committee on Sept. 18, investors may be wondering whether to Buy, Sell, or Hold PHM stock.
Image Source: Zacks Investment Research
PulteGroup Gaining From Land Management & Flexibility
PulteGroup’s land management and flexibility strategy plays a critical role in its financial success, operational efficiency, and resilience within the homebuilding industry. The company’s approach centers around balancing land ownership with flexibility, allowing it to optimize returns while managing risk.
A key part of PulteGroup’s strategy is the increased use of land options, which now account for 53% of the total lots under control. This shift has been bolstered by PulteGroup's growing reliance on third-party land bankers, a strategic move that reduces capital risk while maintaining the ability to adjust land acquisition based on market conditions.
The company has transacted nearly 13,000 lots to date through these land bankers, representing $1.5 billion in capital. This strategy is expected to increase PulteGroup's lot options to 70%, from its historical base of 50%, enabling the company to be more agile in land acquisition and development.
The company’s flexible approach to land management has several advantages. First, it allows PulteGroup to limit upfront capital investment in land, enhancing liquidity and reducing exposure to fluctuations in the housing market. This flexibility also ensures that PulteGroup can adjust its land portfolio and development pace in response to changes in demand, ensuring a more efficient use of resources. In addition, leveraging land options and banking minimizes the company’s reliance on debt, allowing it to maintain a strong balance sheet and improve return on invested capital.
The balance between land ownership and flexibility contributes to higher returns on equity (ROE) as well. While using land options through third-party bankers may result in a trade-off in gross margins (a reduction of 200–300 basis points), the increased flexibility and reduced capital risk more than compensate for this through improved returns. This focus on flexibility, combined with disciplined investment in land, positions PulteGroup to continue delivering strong financial performance even in more volatile market conditions. Given the strength of its land pipeline, PHM continues to expect community count growth of 3% to 5% in the third and fourth quarters of 2024 from the year-ago perspective.
PHM’s Focus on Not Being “Margin Proud”
Management has been emphasizing balancing price, pace, and investment to maximize long-term returns. They reiterated their commitment to not being “margin proud,” indicating a willingness to adjust pricing and incentives to turn assets and maintain volume. This approach is designed to optimize ROE rather than focusing solely on maintaining high margins, which is crucial in a market where consumer confidence and affordability are key concerns.
PulteGroup achieved an ROE of 27.1% over the trailing 12-month period at the end of the second quarter of 2024, reflecting the company’s strong profitability and efficient use of capital. This high ROE is a positive indicator for investors, showing that the company is generating substantial returns relative to shareholder equity.
PulteGroup’s Balanced Operating Model
PulteGroup is emerging through the ongoing housing market volatility by facilitating various strategic initiatives, including a balanced operating model, offering an appealing mortgage rate buydown program and a favorable pricing structure. 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.
At the start of the second quarter, PHM had around 8,100 homes under construction. By the end of the quarter, this number grew to 17,250, with approximately 6,900 of these being speculative homes, which represents 40%. On average, this equates to 1.3 finished speculative homes per community. These figures align with its targets of 40% spec homes and one finished spec per community, positioning the company well to meet delivery goals for the rest of the year. It remains ready to adjust the pace of new spec starts based on sustained shifts in overall demand.
Overall, PulteGroup reiterated the outlook of 5% to 10% longer-term annual growth for the business. Low housing inventory, a desire for homeownership and favorable demographic trends are expected to drive growth in the homebuilding market despite challenges.
What May Pull Back PHM Stock?
The housing market’s sensitivity to interest rate changes remains a significant challenge. PulteGroup noted a slowdown in buyer traffic, particularly in April, which led to a 4% year-over-year decline in net new orders in the second quarter. This fluctuation underscores the sensitivity of the housing market to macroeconomic factors such as interest rates and consumer confidence.
Managing inventory levels, particularly in overbuilt markets like Southwest Florida and parts of Texas, will also be critical. The company must navigate these regional disparities carefully to avoid prolonged periods of high inventory, which could lead to increased incentives and pressure on margins.
What Should PHM Investors Do Now?
Investors should strongly consider buying PulteGroup stock now, given its potential of emerging as a strong player despite the ongoing housing market volatility by facilitating various strategic initiatives, including a balanced operating model, offering an appealing mortgage rate buydown program and a favorable pricing structure. Also, low housing inventory and favorable demographic trends are expected to drive growth in the homebuilding market. Again, a series of rate cuts could potentially lure sidelined homebuyers back into the market, improving the outlook for homebuilders like PHM, who have had to offer incentives to move their inventory.
Technical indicators suggest continued strong performance for PHM. Notably, the company’s shares are currently trading above the 50-day SMA and the 200-day SMA, signaling a bullish trend.
Image Source: Zacks Investment Research
From a valuation perspective, PHM is trading at a forward 12-month earnings multiple of 9.5, lower than the industry’s 11.2, as well as below its five-year high of 13.1. The company has a Value Score of A.
Image Source: Zacks Investment Research
The Zacks Consensus Estimate for 2024 earnings per share (EPS) has increased to $13.36 from $12.85 over the past 60 days. The estimated figure indicates 14% year-over-year growth for the current year. This homebuilder has a long-term EPS growth rate of 19%, which highlights its inherent strength.
This bullish trend justifies the stock’s addition to investors’ portfolios. The trend can also well be depicted by the company’s attractive average brokerage recommendation (ABR). Of the 16 recommendations deriving the current ABR, eight are Strong Buy and one is Buy, giving PHM an impressive ABR of 1.94. The Zacks average price target of $141 per share suggests a 9.9% upside from the last closing price of $128.27.
We believe that this Zacks Rank #2 (Buy) company will achieve significant cash flow benefits this year by reducing construction cycle times from the current 123 days to a targeted 100 days or below and 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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After 27% YTD Jump, Will Rate Cuts Push PulteGroup Stock to New Highs?
PulteGroup, Inc. (PHM - Free Report) is gaining significant attention as markets anticipate a potential rate cut by the Federal Reserve in September. So far this year, the company’s shares have rallied 26.6%, demonstrating impressive resilience amid volatility and mixed industry data. This performance surpasses the Zacks Building Products - Home Builders industry’s 20.8% rise as well as the broader Construction sector's 13% increase and the Zacks S&P 500 Composite's 15.4% growth.
This Atlanta, GA-based homebuilder has strategically capitalized on key tailwinds such as flexible land portfolio and investment strategies, enhanced production efficiency, improved construction cycle times and lower lumber prices. The company's cyclically resilient operating model, effective pricing strategy and mortgage rate buydown program further position it for continued success.
Looking ahead, the anticipated rate cut in September could provide an additional boost to the housing market, further enhancing the outlook for homebuilders like PulteGroup, along with peers such as D.R. Horton (DHI - Free Report) , Lennar Corporation (LEN - Free Report) , and NVR, Inc. (NVR - Free Report) .
On Aug. 23, Federal Reserve chair Jerome Powell signaled a willingness to initiate interest rate cuts, expressing confidence that inflation is approaching the Fed's 2% target. In a speech at the Kansas City Fed's annual economic conference in Jackson Hole, WY, Powell stressed, "The time has come for policy to adjust."
In this scenario, with markets anticipating an interest rate cut by the Federal Open Market Committee on Sept. 18, investors may be wondering whether to Buy, Sell, or Hold PHM stock.
Image Source: Zacks Investment Research
PulteGroup Gaining From Land Management & Flexibility
PulteGroup’s land management and flexibility strategy plays a critical role in its financial success, operational efficiency, and resilience within the homebuilding industry. The company’s approach centers around balancing land ownership with flexibility, allowing it to optimize returns while managing risk.
A key part of PulteGroup’s strategy is the increased use of land options, which now account for 53% of the total lots under control. This shift has been bolstered by PulteGroup's growing reliance on third-party land bankers, a strategic move that reduces capital risk while maintaining the ability to adjust land acquisition based on market conditions.
The company has transacted nearly 13,000 lots to date through these land bankers, representing $1.5 billion in capital. This strategy is expected to increase PulteGroup's lot options to 70%, from its historical base of 50%, enabling the company to be more agile in land acquisition and development.
The company’s flexible approach to land management has several advantages. First, it allows PulteGroup to limit upfront capital investment in land, enhancing liquidity and reducing exposure to fluctuations in the housing market. This flexibility also ensures that PulteGroup can adjust its land portfolio and development pace in response to changes in demand, ensuring a more efficient use of resources. In addition, leveraging land options and banking minimizes the company’s reliance on debt, allowing it to maintain a strong balance sheet and improve return on invested capital.
The balance between land ownership and flexibility contributes to higher returns on equity (ROE) as well. While using land options through third-party bankers may result in a trade-off in gross margins (a reduction of 200–300 basis points), the increased flexibility and reduced capital risk more than compensate for this through improved returns. This focus on flexibility, combined with disciplined investment in land, positions PulteGroup to continue delivering strong financial performance even in more volatile market conditions. Given the strength of its land pipeline, PHM continues to expect community count growth of 3% to 5% in the third and fourth quarters of 2024 from the year-ago perspective.
PHM’s Focus on Not Being “Margin Proud”
Management has been emphasizing balancing price, pace, and investment to maximize long-term returns. They reiterated their commitment to not being “margin proud,” indicating a willingness to adjust pricing and incentives to turn assets and maintain volume. This approach is designed to optimize ROE rather than focusing solely on maintaining high margins, which is crucial in a market where consumer confidence and affordability are key concerns.
PulteGroup achieved an ROE of 27.1% over the trailing 12-month period at the end of the second quarter of 2024, reflecting the company’s strong profitability and efficient use of capital. This high ROE is a positive indicator for investors, showing that the company is generating substantial returns relative to shareholder equity.
PulteGroup’s Balanced Operating Model
PulteGroup is emerging through the ongoing housing market volatility by facilitating various strategic initiatives, including a balanced operating model, offering an appealing mortgage rate buydown program and a favorable pricing structure. 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.
At the start of the second quarter, PHM had around 8,100 homes under construction. By the end of the quarter, this number grew to 17,250, with approximately 6,900 of these being speculative homes, which represents 40%. On average, this equates to 1.3 finished speculative homes per community. These figures align with its targets of 40% spec homes and one finished spec per community, positioning the company well to meet delivery goals for the rest of the year. It remains ready to adjust the pace of new spec starts based on sustained shifts in overall demand.
Overall, PulteGroup reiterated the outlook of 5% to 10% longer-term annual growth for the business. Low housing inventory, a desire for homeownership and favorable demographic trends are expected to drive growth in the homebuilding market despite challenges.
What May Pull Back PHM Stock?
The housing market’s sensitivity to interest rate changes remains a significant challenge. PulteGroup noted a slowdown in buyer traffic, particularly in April, which led to a 4% year-over-year decline in net new orders in the second quarter. This fluctuation underscores the sensitivity of the housing market to macroeconomic factors such as interest rates and consumer confidence.
Managing inventory levels, particularly in overbuilt markets like Southwest Florida and parts of Texas, will also be critical. The company must navigate these regional disparities carefully to avoid prolonged periods of high inventory, which could lead to increased incentives and pressure on margins.
What Should PHM Investors Do Now?
Investors should strongly consider buying PulteGroup stock now, given its potential of emerging as a strong player despite the ongoing housing market volatility by facilitating various strategic initiatives, including a balanced operating model, offering an appealing mortgage rate buydown program and a favorable pricing structure. Also, low housing inventory and favorable demographic trends are expected to drive growth in the homebuilding market. Again, a series of rate cuts could potentially lure sidelined homebuyers back into the market, improving the outlook for homebuilders like PHM, who have had to offer incentives to move their inventory.
Technical indicators suggest continued strong performance for PHM. Notably, the company’s shares are currently trading above the 50-day SMA and the 200-day SMA, signaling a bullish trend.
Image Source: Zacks Investment Research
From a valuation perspective, PHM is trading at a forward 12-month earnings multiple of 9.5, lower than the industry’s 11.2, as well as below its five-year high of 13.1. The company has a Value Score of A.
Image Source: Zacks Investment Research
The Zacks Consensus Estimate for 2024 earnings per share (EPS) has increased to $13.36 from $12.85 over the past 60 days. The estimated figure indicates 14% year-over-year growth for the current year. This homebuilder has a long-term EPS growth rate of 19%, which highlights its inherent strength.
This bullish trend justifies the stock’s addition to investors’ portfolios. The trend can also well be depicted by the company’s attractive average brokerage recommendation (ABR). Of the 16 recommendations deriving the current ABR, eight are Strong Buy and one is Buy, giving PHM an impressive ABR of 1.94. The Zacks average price target of $141 per share suggests a 9.9% upside from the last closing price of $128.27.
We believe that this Zacks Rank #2 (Buy) company will achieve significant cash flow benefits this year by reducing construction cycle times from the current 123 days to a targeted 100 days or below and 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.