Prudent land-acquisition strategies, diverse buyer group and solid housing industry fundamentals bode well for PulteGroup Inc (PHM - Free Report) . The company’s last quarterly earnings surged 111% on a year-over-year basis on the back of higher demand, courtesy of favorable U.S. housing market.
However, shares of the company have lost 10.9% so far this year. But that’s not a reason to get rid of PulteGroup now. The homebuilding industry has declined 18.7% year to date, thanks to elevated raw material costs and interest rates. Moreover, shares of this Zacks Rank #3 (Hold) company have outperformed the industry in the past year, rising 23.3%.
Let’s delve into other factors which make us reasonably confident about this stock.
Land Acquisition Strategy to Boost Profitability
PulteGroup’s annual land-acquisition strategies have resulted in improved volumes, revenues and profitability for quite some time now. In 2017, the company spent $1.1 billion on land acquisition. Considering the healthy housing market fundamentals, PulteGroup expects land-acquisition spend to grow approximately 10% in 2018.
The company projects higher returns on invested capital on the back of plans to moderate the rate of land spend, increase the use of possible land options and accelerate inventory turns. The company is also maximizing the value of its land assets by selling houses at higher prices and better margins, thereby using the strong cash flow to invest in the business, pay off debt and systematically return to shareholders.
Valuation Looks Rational
PulteGroup has a Value Style Score of B, putting it in the top 40% of all the stocks we cover from this perspective. This, combined with a good earnings growth prospects, makes us reasonably confident. Though the company is currently trading at a discount, it has ample opportunities in the near future. In 2018, earnings are expected to grow a solid 51.1%.
The company currently has a P/E ratio of 11.8 which is well below the high scaled over the past five years (20.4). This indicates a good entry point. Moreover, the company currently has a forward P/E ratio (price compared with this year’s earnings) of 8.9 suggesting that a more value-oriented path lies ahead of PulteGroup in the near future.
Positive Housing Market Outlook
Overall fundamentals of the housing market were positive through 2017 and are expected to improve further in 2018. Meanwhile, steady job and wage growth, a recovering economy, rising rentals, rapidly increasing household formation and a limited supply of inventory point at strong demand in 2018.
Improving labor markets, falling unemployment rates and a limited home supply are supporting a consistent rise in home prices, which are expected to boost the top line of homebuilders like PulteGroup, KB Home (KBH - Free Report) , D.R. Horton Inc (DHI - Free Report) and Toll Brothers (TOL - Free Report) . Notably, PulteGroup’s revenues for 2018 are expected to increase 15.4% year over year.
Unhindered by the persistent issues, analysts are optimistic about PulteGroup. Earnings estimates have moved north 6.4% for 2018 and 5.4% for 2019 over the past 60 days, reflecting analysts’ optimism surrounding the company’s future earnings potential. The company’s prudent land investments and strategic initiatives should drive the stock in the upcoming quarters.
You can see the complete list of today’s Zacks #1(Strong Buy) Rank stocks here.
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