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Is PulteGroup's Low P/E Ratio a Hidden Gem or a Risky Bet?
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PulteGroup, Inc. (PHM - Free Report) stock is currently trading at a discount relative to the Zacks Building Products - Home Builders industry. With a forward 12-month Price/Earnings ratio of 10.31x, it sits well below the industry average of 11.06x and the broader Construction sector’s 18.06x. PHM stock also has a Value Score of A.
Over the past three months, PHM stock surged 32.5%, outpacing the industry’s 29.9% growth and the Zacks S&P 500 Composite's 2.5% gain.
PHM is currently trading at only a 4.4% discount to its 52-week high of $145.84, reached on Sept. 19, 2024, after the Fed cut interest rate by a 50-basis point (bps) at the September 2024 Federal Open Market Committee meeting, easing monetary policy for the first time in four years due to progress on the Fed's dual mandate. This lowers the interest rate target to a range of 4.75% to 5%.
On a further encouraging note, Jerome Powell hinted at two additional rate cuts in 2024 and expects the cuts to continue into 2025. This move could provide an additional boost to the entire homebuilding 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) .
PulteGroup’s cheap valuation should lure investors seeking value. But is the time right to buy PHM’s shares based on its attractive valuation? Let’s delve deeper.
Three-Month Share Performance
Image Source: Zacks Investment Research
The stock is currently trading above both its 50-day and 200-day moving averages, indicating strong investor confidence and a favorable market outlook.
Image Source: Zacks Investment Research
Factors Acting in Favor of PulteGroup
Spec (speculative) Vs Build-to-Order (BTO) Approaches: PulteGroup’s operational strategy involves a balanced mix of spec and BTO homes. This approach allows the company to remain responsive to changing market demands. In the second quarter of 2024, PulteGroup had approximately 17,250 homes under construction, with 40% of these being speculative homes. This balance ensures that the company can meet short-term demand while also adjusting its build pace based on long-term market shifts. By maintaining 1.3 finished spec homes per community, the company is positioned to meet its delivery targets for the year. This flexibility allows PulteGroup to accelerate or slow down the construction of spec homes depending on demand fluctuations.
Focus on Return on Equity (ROE) Over Margins: PulteGroup’s management focuses on optimizing ROE rather than solely preserving high margins. They have emphasized not being “margin proud,” prioritizing asset turnover and volume to ensure sustainable long-term returns. By adjusting pricing and offering incentives, PulteGroup maximizes volume while maintaining a balance between price and pace. The company’s ability to generate an ROE of 27.1% by the second quarter of 2024 underscores its efficient capital use and strong profitability. This high ROE is appealing to investors, as it signals that PulteGroup is delivering significant returns relative to shareholder equity, even in challenging market conditions.
Land Management and Flexibility Strategy: PulteGroup's success stems from its strategic land management, balancing land ownership with land options to optimize returns and reduce risks. Currently, 53% of its lots are controlled through land options, with plans to increase this to 70%. The company also relies heavily on third-party land bankers, having transacted 13,000 lots and freeing up $1.5 billion in capital.
This approach offers key advantages, including reduced capital investment, improved liquidity, and flexibility to adjust land acquisitions based on market conditions. It also limits exposure to market fluctuations. While using land options may reduce gross margins by 200-300 bps, this is offset by improved returns and reduced capital risk. 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.
A Few Hiccups for PHM
Effectively managing inventory, especially in overbuilt regions such as Southwest Florida and parts of Texas, will be crucial. The company must carefully address these regional imbalances to prevent extended periods of high inventory, which could lead to heightened incentives and pressure on profit margins.
The housing market's vulnerability to interest rate fluctuations continues to pose a major challenge. PulteGroup observed a decrease in buyer traffic, especially in April, resulting in a 4% year-over-year drop in net new orders for the second quarter. This shift highlights the market's responsiveness to broader economic factors, including interest rates and consumer sentiment.
How PulteGroup's Consensus Estimate Compare
Positive sentiment surrounding PulteGroup has led to upward revisions in the Zacks Consensus Estimate for earnings per share. Over the past 60 days, analysts have raised their estimates for both the current and next year. These revised figures suggest year-over-year growth rates of 14% and 1.7%, respectively.
Image Source: Zacks Investment Research
Price Target Suggests Potential Upside for PHM
The company's strong position is further emphasized by its attractive Average Brokerage Recommendation (ABR). Out of 16 recommendations that contribute to the current ABR, eight analysts have rated the stock as a Strong Buy, while one has given it a Buy rating. This results in an impressive ABR of 1.94 for the company. According to Zacks, the average price target for the stock stands at $145.33 per share, indicating a potential 4.2% upside from the most recent closing price of $139.44.
Buy, Sell, or Hold PulteGroup Stock
Investors should consider buying PulteGroup stock now, as it shows strong potential to thrive amid ongoing housing market volatility. The company is implementing strategic initiatives, including a balanced operating model, an appealing mortgage rate buydown program, and a favorable pricing structure. These efforts position PulteGroup favorably for future growth.
Low housing inventory and favorable demographic trends are also expected to drive long-term growth in the homebuilding sector. Additionally, anticipated interest rate cuts could attract sidelined homebuyers back to the market, improving prospects for homebuilders like PulteGroup.
As a Zacks Rank #2 (Buy) company, PulteGroup is on track to achieve significant cash flow benefits this year. By targeting a reduction in construction cycle times from 123 days to 100 days or less, the company aims to generate 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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Is PulteGroup's Low P/E Ratio a Hidden Gem or a Risky Bet?
PulteGroup, Inc. (PHM - Free Report) stock is currently trading at a discount relative to the Zacks Building Products - Home Builders industry. With a forward 12-month Price/Earnings ratio of 10.31x, it sits well below the industry average of 11.06x and the broader Construction sector’s 18.06x. PHM stock also has a Value Score of A.
Over the past three months, PHM stock surged 32.5%, outpacing the industry’s 29.9% growth and the Zacks S&P 500 Composite's 2.5% gain.
PHM is currently trading at only a 4.4% discount to its 52-week high of $145.84, reached on Sept. 19, 2024, after the Fed cut interest rate by a 50-basis point (bps) at the September 2024 Federal Open Market Committee meeting, easing monetary policy for the first time in four years due to progress on the Fed's dual mandate. This lowers the interest rate target to a range of 4.75% to 5%.
On a further encouraging note, Jerome Powell hinted at two additional rate cuts in 2024 and expects the cuts to continue into 2025. This move could provide an additional boost to the entire homebuilding 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) .
PulteGroup’s cheap valuation should lure investors seeking value. But is the time right to buy PHM’s shares based on its attractive valuation? Let’s delve deeper.
Three-Month Share Performance
Image Source: Zacks Investment Research
The stock is currently trading above both its 50-day and 200-day moving averages, indicating strong investor confidence and a favorable market outlook.
Image Source: Zacks Investment Research
Factors Acting in Favor of PulteGroup
Spec (speculative) Vs Build-to-Order (BTO) Approaches: PulteGroup’s operational strategy involves a balanced mix of spec and BTO homes. This approach allows the company to remain responsive to changing market demands. In the second quarter of 2024, PulteGroup had approximately 17,250 homes under construction, with 40% of these being speculative homes. This balance ensures that the company can meet short-term demand while also adjusting its build pace based on long-term market shifts. By maintaining 1.3 finished spec homes per community, the company is positioned to meet its delivery targets for the year. This flexibility allows PulteGroup to accelerate or slow down the construction of spec homes depending on demand fluctuations.
Focus on Return on Equity (ROE) Over Margins: PulteGroup’s management focuses on optimizing ROE rather than solely preserving high margins. They have emphasized not being “margin proud,” prioritizing asset turnover and volume to ensure sustainable long-term returns. By adjusting pricing and offering incentives, PulteGroup maximizes volume while maintaining a balance between price and pace. The company’s ability to generate an ROE of 27.1% by the second quarter of 2024 underscores its efficient capital use and strong profitability. This high ROE is appealing to investors, as it signals that PulteGroup is delivering significant returns relative to shareholder equity, even in challenging market conditions.
Land Management and Flexibility Strategy: PulteGroup's success stems from its strategic land management, balancing land ownership with land options to optimize returns and reduce risks. Currently, 53% of its lots are controlled through land options, with plans to increase this to 70%. The company also relies heavily on third-party land bankers, having transacted 13,000 lots and freeing up $1.5 billion in capital.
This approach offers key advantages, including reduced capital investment, improved liquidity, and flexibility to adjust land acquisitions based on market conditions. It also limits exposure to market fluctuations. While using land options may reduce gross margins by 200-300 bps, this is offset by improved returns and reduced capital risk. 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.
A Few Hiccups for PHM
Effectively managing inventory, especially in overbuilt regions such as Southwest Florida and parts of Texas, will be crucial. The company must carefully address these regional imbalances to prevent extended periods of high inventory, which could lead to heightened incentives and pressure on profit margins.
The housing market's vulnerability to interest rate fluctuations continues to pose a major challenge. PulteGroup observed a decrease in buyer traffic, especially in April, resulting in a 4% year-over-year drop in net new orders for the second quarter. This shift highlights the market's responsiveness to broader economic factors, including interest rates and consumer sentiment.
How PulteGroup's Consensus Estimate Compare
Positive sentiment surrounding PulteGroup has led to upward revisions in the Zacks Consensus Estimate for earnings per share. Over the past 60 days, analysts have raised their estimates for both the current and next year. These revised figures suggest year-over-year growth rates of 14% and 1.7%, respectively.
Image Source: Zacks Investment Research
Price Target Suggests Potential Upside for PHM
The company's strong position is further emphasized by its attractive Average Brokerage Recommendation (ABR). Out of 16 recommendations that contribute to the current ABR, eight analysts have rated the stock as a Strong Buy, while one has given it a Buy rating. This results in an impressive ABR of 1.94 for the company. According to Zacks, the average price target for the stock stands at $145.33 per share, indicating a potential 4.2% upside from the most recent closing price of $139.44.
Buy, Sell, or Hold PulteGroup Stock
Investors should consider buying PulteGroup stock now, as it shows strong potential to thrive amid ongoing housing market volatility. The company is implementing strategic initiatives, including a balanced operating model, an appealing mortgage rate buydown program, and a favorable pricing structure. These efforts position PulteGroup favorably for future growth.
Low housing inventory and favorable demographic trends are also expected to drive long-term growth in the homebuilding sector. Additionally, anticipated interest rate cuts could attract sidelined homebuyers back to the market, improving prospects for homebuilders like PulteGroup.
As a Zacks Rank #2 (Buy) company, PulteGroup is on track to achieve significant cash flow benefits this year. By targeting a reduction in construction cycle times from 123 days to 100 days or less, the company aims to generate 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.