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Bull of the Day: PulteGroup (PHM)

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PulteGroup, Inc. (PHM - Free Report) is a big winner from the coronavirus pandemic as American's focus on their home. This Zacks Rank #1 (Strong Buy) is expected to see earnings growth by double digits this year.

PulteGroup is the third largest homebuilder in the United States with developments in 23 states and in 42 major markets. Its brands include Centex, Pulte Homes, Del Webb, DiVosta Homes, American West and John Wieland Homes and neighborhoods.

It's product mix include 29% first-time buyers, 45% in move-up and 26% in active adult communities.

Huge Beat in the Second Quarter

On July 23, PulteGroup reported second quarter earnings and crushed the Zacks Consensus by 36.9%, or $0.31. Earnings were $1.15 versus the consensus of $0.84.

After weakness in mid-March through April, new homes sales accelerated throughout the rest of the quarter. By June, net orders were up 77% for first time buyers, 48% for move-up and 21% for active adult.

Sales were so strong, Pulte was able to raise prices at about 50% of its communities in the quarter and use less incentives.

The company saw only limited COVID disruptions. It was an essential business so construction continued.

All of its communities were running at full capacity by July.

Closings rose 6% to 5,937 homes but average sales price fell 3% to $416,000. The decline in sales price was due to a shift in their buyers with more first-time buyers in the mix. They usually buy at a lower price.

Gross margin rose to 23.9%, an increase of 80 basis points year-over-year and up 20 basis points from the first quarter.

This is an industry-leading gross margin.

New orders for the second quarter fell 4% to 6,522 homes.

But unit backlog rose 12%, or 1,421 homes, year-over-year to 13,214 homes with a total value of $5.8 billion.

Momentum Continued into Q3

PulteGroup gave strong full year gross margin guidance of between 23.8% to 24.1%. That's industry leading.

The company saw continued momentum in sales into July.

It shouldn't be surprising that the analysts are bullish on Pulte for Q3 and 2020 as well.

5 estimates were revised higher since the earnings report which pushed the Zacks Consensus for 2020 up to $4.26 from $2.94 just 30 days previously.

That's 2020 earnings growth of 22.1% as the company made just $3.49 in 2019.

Strong Cash Flow

PulteGroup got conservative in March, when the pandemic hit. It cut costs, suspended its share buybacks and tapped its revolver so it would have cash on hand.

But after strong cash flow in the second quarter, it repaid $700 million of the revolving credit facility it took out in March 2020.

And even with that, it's cash balance still remained $1.7 billion at the end of the quarter.

PulteGroup is still paying a dividend, currently yielding 1.1%.

Shares Surge But Should You Be Buying?

PulteGroup shares are up 16% year-to-date as the home builders remain hot.

But Pulte is still attractively valued.

It has a forward P/E of just 10.4 and a P/B of just 2.0. A P/B ratio under 3.0 usually indicates value.

PulteGroup isn't the only Zacks Rank #1 (Strong Buy) homebuilder.

There are 8 others including DR Horton (DHI - Free Report) , NVR Inc. (NVR - Free Report) , Beazer Homes (BZH - Free Report) and Meritage Homes (MTH - Free Report) and it's now ranked in the top 2% of Zacks Ranked Industries.

If you're looking for a way to play the focus on the home in the age of coronavirus, PulteGroup is stock to keep on your short list.

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