Past Performance: We all know about the housing bubble that went pop. Over the past four years, PulteGroup (PHM) hasn't posted a positive EPS in the first quarter. Yet, the EPS expectations for PHM in the first quarter this year is $.14 per share. If Pulte can meet or beat these expectations, it would signify a powerful move in the right direction for the housing market.
Over the past four years of earnings releases PHM has met or beat EPS expectations eight times, and missed EPS expectations eight times. Pulte has rebounded quite nicely for those who were brave enough to venture in to the stock in January of 2012, rebounding from just $6.54 to current levels near $20 per share. Pulte's five-year high is $21.67, set on January 21, 2013, and it may have trouble moving past that mark until the Federal Reserve raises interest rates.
Fundamentals: The market is trying hard to price in the housing market rebound in to the housing sector as a whole. Currently, PHM trades with a P/E of 36.80, a Forward P/E of 13.70, a P/S of 1.59, and a PEG of 0.57. The S&P 500, for comparison purposes, trades with a P/E of 20.5 and a Forward P/E of 17.7. While PHM may seem overvalued by way of current P/E and P/S ratio, the Forward P/E and PEG ratio tell a completely different story.
When investing in a rebound story, it is important to look at the future metrics more than the current metrics. If a market is in an obvious upswing, why would you use the current valuations when the market is trending upward? That is why it is important to watch the Forward P/E and PEG on PHM to find a true valuation of the company. I feel comfortable in Pulte until either the Forward P/E reaches the S&P 500 Forward P/E mark, or the PEG reaches a 0.90 valuation.
The Story: New home sales spiked 15.6% in January showing that housing turnaround is thoroughly under way. The inventory of existing homes has decreased about 30%, and the delinquency rate has dropped from 2.19% in December of 2011 to just 1.68% in December of 2012 as a measure of first mortgage defaults. If you need more proof of a housing turnaround, look down the street where you live. You will see far fewer foreclosure, short sale, and for sale signs. The housing market is in full rebound mode.
The only thing standing in the way of the housing market is the Federal Reserve. With interest rates at exorbitantly low levels, banks are less inclined to make loans as they can make better returns investing those funds elsewhere. By the end of the year the Federal Reserve will most likely raise interest rates, if not signal the market that an interest rate hike is coming. When interest rates rise, banks will be more inclined to lend to the individual consumer and potential homeowners again. That should help light the housing market on fire, turning the seemingly slow recovery in the housing market into a thriving housing market.
How To Play It: Although PHM is near a 52-week high and current valuations seem a bit overvalued, future metrics of PulteGroup show that the stock is still undervalued. A Federal Reserve interest rate move upward would signal a phenomenal time to buy. Looking at the short-term side, more specifically earnings season, a move to positive EPS in the first quarter would signal that PHM has reclaimed the rightful position as a top three homebuilder play. My personal 52-week price target: $31.01.
Disclosure: I am long PHM.
Additional disclosure: Always consult with a registered financial professional before adding a new position to your portfolio. Investing involves a significant risk of loss, as such never invest more than you can afford to lose.