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PulteGroup (PHM) Up 54% in 6 Months: Can It Keep Momentum in 2024?
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The scarcity of available existing homes for sale, coupled with a positive trend in mortgage rates and indications from the Federal Reserve suggesting a potential rate cut, indicates growing optimism in the homebuilding industry. In this environment, quality homebuilding stocks such as PulteGroup, Inc. (PHM - Free Report) may provide a safe haven.
PHM's stability and strong fundamentals position it well to withstand challenges within the industry. With the anticipation of interest rates remaining lower in 2024, PulteGroup maintains an optimistic outlook, believing that the enhanced affordability dynamics will persist in drawing buyers to the market.
Shares of this Atlanta, GA-based homebuilder have rallied 54.1% over the past six months, outperforming the Zacks Building Products - Home Builders industry’s 41.2% rise. This Zacks Rank #3 (Hold) stock has a long-term earnings growth rate of 12.6%, which highlights its inherent strength. The company’s prudent land investments and focus on entry-level buyers raise hopes.
Image Source: Zacks Investment Research
However, rising land/labor and material costs and competitive pricing pressure remain concerns. Nonetheless, the Zacks Consensus Estimate has witnessed an uptrend over the past 30 days as analysts raised their estimates, depicting optimism about the stock’s growth potential. Over the said time frame, the Zacks Consensus Estimate for 2024 earnings per share (EPS) has increased to $11.77 from $11.72.
The growth prospect is further solidified with a VGM Score of A, backed by a Value Score of A, a Growth Score of B and a Momentum Score of A. The positive trend signifies bullish analysts’ sentiments, robust fundamentals and prospects of an outperformance in the near term.
Let’s delve deeper.
Driving Factors
Improving Macro Scenario: The housing outlook is becoming more positive, with a strong job market, limited availability of existing homes for sale and improving mortgage rates. As the inflation rate displays indications of easing and the economy remains stable, the Federal Open Market Committee's unanimous decision to sustain the benchmark within a targeted range of 5.25%-5.5% offers stability for homebuilders.
On Mar 20, 2024, the Federal Reserve opted to maintain its key interest rate unchanged for the fifth consecutive meeting, citing the need for further data before considering rate cuts. Although Fed officials are confronted with the challenge of striking a balance between the potential pitfalls of acting prematurely or delaying action, a majority of Fed policymakers still anticipate three rate cuts in 2024. However, their projections for rate cuts in 2025 and 2026 have been revised downward. Additionally, they foresee slightly higher interest rates in the long term compared to their December projections.
Prudent Land Investments: PulteGroup has consistently experienced enhanced volumes, revenues and profitability, given its annual land acquisition strategies. In 2023, the company invested $4.3 billion in land acquisition and development, with 59% allocated to development endeavors. For 2024, PHM intends to increase its land expenditure to approximately $5 billion, aiming for a distribution of around 60/40 between development and land acquisition. This uptick in investment aligns with the company's objective of maintaining consistent annual growth in future delivery volumes, targeting a range of 5%-10%.
Focus on First-Time/Entry-Level Buyers: PulteGroup maintains its focus on catering to the increasing demand for entry-level homes, recognizing the necessity for more affordable housing options amid prevailing affordability concerns in the U.S. housing market. In the fourth quarter of 2023, first-time buyers constituted 40% of its customer base, while move-up buyers comprised 36%, and active adult buyers made up 24%. This shift toward prioritizing first-time buyers aligns with the company's strategy to have more than one-third of its business directed toward this segment.
Regarding order activity categorized by buyer group, there was a notable 70% increase in net new orders from first-time buyers, a 78% increase from move-up buyers and a 15% rise from active adult buyers. These order figures indicate a heightened demand across all buyer groups, suggesting a positive trajectory for potential housing demand in 2024.
Hurdles to Cross
Margin Pressure: Escalating land and labor costs pose a threat to margins. Labor shortages are resulting in increased wages, and limited availability is driving up land prices. Simultaneously, significant cost pressures from finished lots, skilled labor and rising material costs may impact margins across all key regions.
Also, homebuilders are offering incentives to stimulate sales, thereby increasing their operating expenses. During the fourth quarter of 2023, home sales gross margins contracted 50 basis points (bps) year over year due to higher incentive and input costs. SG&A expenses (as a percentage of home sale revenues) increased 30 bps year over year to 7.4%.
For 2024, PHM anticipates that land and house cost inflation will result in gross margins in the range of 28%-28.5% for each quarter during the year. In 2023, the gross margin from home sales was 29.3%. SG&A expenses are expected in the range of 9.2%-9.5% of home sale revenues. In 2023, SG&A expenses were 8.4% of home sale revenues.
NVR delivered a trailing four-quarter earnings surprise of 8.1%, on average. The Zacks Consensus Estimate for NVR’s 2024 sales and earnings per share (EPS) indicates growth of 7.7% and 4.6%, respectively, from the prior-year levels.
Vulcan Materials Company (VMC - Free Report) currently sports a Zacks Rank of 1. The stock has risen 35.4% in the past six months.
VMC delivered a trailing four-quarter earnings surprise of 19.5%, on average. The Zacks Consensus Estimate for VMC’s 2024 sales and EPS indicates an improvement of 1.4% and 19.4%, respectively, from a year ago.
Sterling Infrastructure, Inc. (STRL - Free Report) presently sports a Zacks Rank of 1. Shares of STRL have increased 53.1% in the past six months.
STRL has a trailing four-quarter earnings surprise of 20.4%, on average. The Zacks Consensus Estimate for STRL’s 2024 sales and EPS indicates a rise of 11.7% and 11.4%, respectively, from the prior-year levels.
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PulteGroup (PHM) Up 54% in 6 Months: Can It Keep Momentum in 2024?
The scarcity of available existing homes for sale, coupled with a positive trend in mortgage rates and indications from the Federal Reserve suggesting a potential rate cut, indicates growing optimism in the homebuilding industry. In this environment, quality homebuilding stocks such as PulteGroup, Inc. (PHM - Free Report) may provide a safe haven.
PHM's stability and strong fundamentals position it well to withstand challenges within the industry. With the anticipation of interest rates remaining lower in 2024, PulteGroup maintains an optimistic outlook, believing that the enhanced affordability dynamics will persist in drawing buyers to the market.
Shares of this Atlanta, GA-based homebuilder have rallied 54.1% over the past six months, outperforming the Zacks Building Products - Home Builders industry’s 41.2% rise. This Zacks Rank #3 (Hold) stock has a long-term earnings growth rate of 12.6%, which highlights its inherent strength. The company’s prudent land investments and focus on entry-level buyers raise hopes.
Image Source: Zacks Investment Research
However, rising land/labor and material costs and competitive pricing pressure remain concerns. Nonetheless, the Zacks Consensus Estimate has witnessed an uptrend over the past 30 days as analysts raised their estimates, depicting optimism about the stock’s growth potential. Over the said time frame, the Zacks Consensus Estimate for 2024 earnings per share (EPS) has increased to $11.77 from $11.72.
The growth prospect is further solidified with a VGM Score of A, backed by a Value Score of A, a Growth Score of B and a Momentum Score of A. The positive trend signifies bullish analysts’ sentiments, robust fundamentals and prospects of an outperformance in the near term.
Let’s delve deeper.
Driving Factors
Improving Macro Scenario: The housing outlook is becoming more positive, with a strong job market, limited availability of existing homes for sale and improving mortgage rates. As the inflation rate displays indications of easing and the economy remains stable, the Federal Open Market Committee's unanimous decision to sustain the benchmark within a targeted range of 5.25%-5.5% offers stability for homebuilders.
On Mar 20, 2024, the Federal Reserve opted to maintain its key interest rate unchanged for the fifth consecutive meeting, citing the need for further data before considering rate cuts. Although Fed officials are confronted with the challenge of striking a balance between the potential pitfalls of acting prematurely or delaying action, a majority of Fed policymakers still anticipate three rate cuts in 2024. However, their projections for rate cuts in 2025 and 2026 have been revised downward. Additionally, they foresee slightly higher interest rates in the long term compared to their December projections.
Prudent Land Investments: PulteGroup has consistently experienced enhanced volumes, revenues and profitability, given its annual land acquisition strategies. In 2023, the company invested $4.3 billion in land acquisition and development, with 59% allocated to development endeavors. For 2024, PHM intends to increase its land expenditure to approximately $5 billion, aiming for a distribution of around 60/40 between development and land acquisition. This uptick in investment aligns with the company's objective of maintaining consistent annual growth in future delivery volumes, targeting a range of 5%-10%.
Focus on First-Time/Entry-Level Buyers: PulteGroup maintains its focus on catering to the increasing demand for entry-level homes, recognizing the necessity for more affordable housing options amid prevailing affordability concerns in the U.S. housing market. In the fourth quarter of 2023, first-time buyers constituted 40% of its customer base, while move-up buyers comprised 36%, and active adult buyers made up 24%. This shift toward prioritizing first-time buyers aligns with the company's strategy to have more than one-third of its business directed toward this segment.
Regarding order activity categorized by buyer group, there was a notable 70% increase in net new orders from first-time buyers, a 78% increase from move-up buyers and a 15% rise from active adult buyers. These order figures indicate a heightened demand across all buyer groups, suggesting a positive trajectory for potential housing demand in 2024.
Hurdles to Cross
Margin Pressure: Escalating land and labor costs pose a threat to margins. Labor shortages are resulting in increased wages, and limited availability is driving up land prices. Simultaneously, significant cost pressures from finished lots, skilled labor and rising material costs may impact margins across all key regions.
Also, homebuilders are offering incentives to stimulate sales, thereby increasing their operating expenses. During the fourth quarter of 2023, home sales gross margins contracted 50 basis points (bps) year over year due to higher incentive and input costs. SG&A expenses (as a percentage of home sale revenues) increased 30 bps year over year to 7.4%.
For 2024, PHM anticipates that land and house cost inflation will result in gross margins in the range of 28%-28.5% for each quarter during the year. In 2023, the gross margin from home sales was 29.3%. SG&A expenses are expected in the range of 9.2%-9.5% of home sale revenues. In 2023, SG&A expenses were 8.4% of home sale revenues.
Better-Ranked Stocks From the Construction Sector
NVR, Inc. (NVR - Free Report) currently sports a Zacks Rank #1 (Strong Buy). The stock has rallied 33.5% in the past six months. You can see the complete list of today’s Zacks #1 Rank stocks here.
NVR delivered a trailing four-quarter earnings surprise of 8.1%, on average. The Zacks Consensus Estimate for NVR’s 2024 sales and earnings per share (EPS) indicates growth of 7.7% and 4.6%, respectively, from the prior-year levels.
Vulcan Materials Company (VMC - Free Report) currently sports a Zacks Rank of 1. The stock has risen 35.4% in the past six months.
VMC delivered a trailing four-quarter earnings surprise of 19.5%, on average. The Zacks Consensus Estimate for VMC’s 2024 sales and EPS indicates an improvement of 1.4% and 19.4%, respectively, from a year ago.
Sterling Infrastructure, Inc. (STRL - Free Report) presently sports a Zacks Rank of 1. Shares of STRL have increased 53.1% in the past six months.
STRL has a trailing four-quarter earnings surprise of 20.4%, on average. The Zacks Consensus Estimate for STRL’s 2024 sales and EPS indicates a rise of 11.7% and 11.4%, respectively, from the prior-year levels.