PulteGroup: A Strong Homebuilder GARP Pick – PulteGroup, Inc. (NYSE:PHM) | Seeking Alpha

Image for PulteGroup: A Strong Homebuilder GARP Pick - PulteGroup, Inc. (NYSE:PHM) | Seeking Alpha

PulteGroup stands out as one of the premier homebuilders in the nation, with significant representation within various regions and markets.At its current valuation, there are various metrics that deem

Summary

PulteGroup stands out as one of the premier homebuilders in the nation, with significant representation within various regions and markets.

At its current valuation, there are various metrics that deem the stock desirable from a value perspective.

In addition, PulteGroup has a plethora of future opportunities to grow within the residential construction sector.

In the wake of the housing crisis years past, the homebuilding sector has stormed back in astounding fashion. The SPDR Homebuilders ETF has appreciated over 200% since its 2009 low; currently, the consensus on the status of the housing market as a whole is that its “recovery is intact […] driven by a tight labor market, marked by a 4.4 percent unemployment rate, which is generating wage increases and boosting employment opportunities for young Americans”.

XHB Chart

Overall, the homebuilding sector looks like a strong investment; it would not be out of the question to simply invest in (NYSEARCA:XHB), the aforementioned Homebuilders ETF. But a current standout company within the sector is PulteGroup, Inc (NYSE:PHM). It is a company that stands as one of the largest in market cap within the homebuilding sector, and brings forth a unique combination of value and growth that makes it a worthwhile investment.

Currently, they operate within 49 markets throughout 25 states. Of course, their central core business is based on their homebuilding operations, which looks to have a positive forecast within the near future. In fact, after “several years of declining sales volume, new home sales in the U.S. increased in 2012 for the first time since 2005″. This has stirred up a positive trend in demand for homes, and it has continued since for the past fiscal year. New home sales in the United States overall rose a strong 12% to approximately 563,000 homes, an approximately 84% increase from 2011.

In addition, PulteGroup had a considerably stronger year over year growth performance for the year of 2016 than other recent years. This is fueled by a combination of relatively low mortgage interest rates by historical standards, as well as low overall inventory of homes currently available for sale, which will likely spur continued rapid growth in PulteGroup’s homebuilding operations. This is because more homes will need to be built to maintain inventory levels.

US 30 Year Mortgage Rate Chart

Homebuilding Operations and YOY Growth

 

2016 2015 2014 2013 2012
Home Sale Revenues $7,451,315 $5,792,675 $5,662,171 $5,424,309 $4,662,412
Home Sale Revenues YOY % Growth 28.63% 2.30% 4.39% 16.3% N.A.
Home Closings 19,951 17,127 17,196 17,766 16,505
Home Closings YOY % Growth 16.49% (.40%) (3.21%) 7.64% N.A.

 

Data provided by PulteGroup’s 2016 10-K

The current number of people that satisfy the demographic of being primary customers for homes is on the rise, simply due to the composition of the ages of people within the United States, as well as a healthy job market with a notably low unemployment rate. Prices in the housing market are also increasing, but that has also not stopped the growing confidence in them.

These growth metrics put PulteGroup within a positive light as a company overall. Nonetheless, what corroborates the bullish stance on their stock is their relative valuation with respect to their industry, and their current growth prospects.

The company’s earnings per share is projected to grow significantly within the next two years, and they have also had a history of outperforming their earnings estimates. If this trend continues, then future earnings releases could very well be catalysts towards propelling their valuation higher.

Data provided by SunGard on 6/9/17

To corroborate the case of PulteGroup being an opportunity for investment, their current P/E ratio, price/sales ratio, price/book ratio, and PEG ratio all are below the industry averages by a considerable margin. This shows PulteGroup as possessing a considerable relative discount when compared to its peers, further adding to their prospective worth as an investment pick.

Valuation Statistics

 

P/E Ratio Price/Sales Ratio Price/Book Ratio PEG Ratio
PHM 12.85x 0.94x 1.59x 0.63x
Industry 18.05x 1.61x 2.91x 0.46x
PHM % Discount 28.81% 41.61% 45.36% 28.81%

 

Data provided by SunGard on 6/7/17

A notable trend that PulteGroup has set forth is their commitment to returning capital to shareholders through share repurchases and their dividend. Although their dividend, established recently, has been relatively stagnant, they are quickly repurchasing shares, and have been on this trend for quite some time. This combination of their relative valuation and their commitment to returning capital to shareholders bodes well for their potential as an investment.

And finally, PulteGroup is still aggressively trying to acquire more land to develop and sell. During 2016, they opened around 200 more communities across the diversified markets that they currently operate in, and also acquired the assets of JW Homes in order to further expand their operations and outreach. They increased their land investment spending by a solid 24% to support future growth, they are planning on continuing this trend during the next few years as well. As long as the housing market continues its recovery and future upswing, PulteGroup is well positioned to take full advantage of the growth opportunities they now have.

In conclusion, PulteGroup offers a unique combination of growth and value within an industry that has been undoubtedly heating up recently. Their stock is arguably relatively undervalued when compared to their broader industry, while also possessing alluring growth opportunities and means of returning capital back to shareholders.

Disclosure:I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

https://seekingalpha.com/article/4080529-pultegroup-strong-homebuilder-garp-pick

On – 10 Jun, 2017 By Kevin H Li