Today, we look at PulteGroup (PHM) one of the largest homebuilders in the nation. I was heavily positioned in the homebuilder stocks and housing market-related stock plays like Hooker Furniture (HOFT) throughout most of 2020. I recognized early on that the pandemic and the government-issued lockdowns would accelerate the flight out of large, high-tax cities like NYC that has been an 'off the radar' undercurrent over the past few years which came fully to light in 2020.
The migration out of big cities to less dense areas of the country should continue to be a theme in the housing market for at least a few more years. PulteGroup did not benefit from this trend nearly as much as some much smaller homebuilding concerns like LGI Homes (LGIH) did in 2020. However, the stock recovered quickly from its March meltdown lows. Will the stock play 'catch up' in 2021? We take a quick look in the paragraphs below.
Company Overview
PulteGroup is headquartered out of Atlanta, Georgia and offers various home designs, including single-family detached, townhouses, condominiums, and duplexes under the Centex, Pulte Homes, Del Webb, DiVosta Homes, and John Wieland Homes and Neighborhoods brand names. The stock trades right at $42.00 a share currently and has an approximate market cap of $11.5 billion.
On October 22nd, the company reported adjusted earnings of $1.34 a share, nearly 20 cents a share above the consensus. Revenues grew nine percent on a year-over-year basis to $2.95 billion, revenues from home sales grew seven percent. This was approximately $175 million above the consensus. Homebuilding gross margin came in at 24.5%, a touch above expectations and just above the company's previous guidance range of 23.9%-24.2%. Net new orders grew 36% to 8,202 homes, while the value of those orders increased 43% to $3.6 billion.
Despite more than solid numbers, the stock took an approximate five percent hit on the release of quarterly results as the company provided conservative guidance of 6,600 to 6,900 homes to be delivered in the fourth quarter, just below the 6,930 consensus. However, the average sales price range of $440,000 to $450,000 was slightly above analyst expectations of $435,000. The company is seeing one of its highest overall order backlogs of the past decade.
Analyst Commentary and Balance Sheet
Pulte has picked up some momentum in the analyst community in recent months. Truist Financial upgraded Pulte as well as several other homebuilders on November 20th with this statement. “We believe the millennial-driven housing boom has significant runway, as the largest cohort of the largest generation heads into their prime home-buying years (2020-2025)" and listed four reasons why housing will be even stronger in 2021. UBS initiated PHM as a new Buy with a $57 price target on December 8th. 10 days later, Barclays upgraded Pulte to an Overweight from an Equal Weight with a $59 price target. The analyst at Barclays stated at the time that
Homebuilders are trading at only 1.4 times 2021 tangible book value in a year where "exceptional" pricing is likely to drive an uptick in gross margins not seen since 2013. The analyst believes PulteGroup's valuation does not reflect its 2021 return on equity. Further, the condition of the re-sale market may be unappreciated, as the builder price premium is slimming relative to existing homes, and builders should accelerate share gain."
There has been no insider selling in this name since August. On October 27th, one insider added just over $200,000 worth of shares to his holdings. As you can see from the chart above and below the company has done a good job of reducing leverage in recent years and has over $2 billion in cash on the balance sheet.
Verdict
There has been some increasing calls from some pundits that the rally in home prices and the housing market is starting to get overdone. From a historical perspective they could be very well right. Homebuilding stocks have done little over the past three months but mark time even while the overall market has continued to rally.
However, with mortgage rates at record lows and the exodus out of major cities like Chicago, San Francisco and New York City continuing as homelessness and crime rates surge, the housing market could remain stronger and for longer than most cycles.
I have taken some profits in my small homebuilders like LGIH that did so well in 2020. However, I just took an initial position again in Pulte using some covered call orders. This simple option strategy provides for decent downside protection and solid potential returns even if the stock of Pulte goes sideways for a while. I utilized the July $42 call strikes this week to execute those orders.
This caution is more due to my view that the overall market is overdue for a pullback more than anything negative about Pulte. The stock was one of the few homebuilding stocks to not rally strongly in 2020. The shares appear cheap at less than eight times next year's expected profits and the stock also has a small dividend of 1.3%.
Bret Jensen is the Founder of and authors articles for the Biotech Forum, Busted IPO Forum, and Insiders Forum
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