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Here's Why You Should Buy PulteGroup (PHM) Stock Right Now

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Undeniably, there have been indications that the thriving housing market is losing steam of late. Factors like increasing construction costs, inadequacy of skilled labor and rising prices of homes owing to higher mortgage rates continue to make things difficult.

Despite these headwinds, homebuilder PulteGroup Inc. (PHM - Free Report) is one such company that continues to display strength in several areas and has managed to navigate smoothly. Shares of PulteGroup have returned 1.6% in the past year against the industry’s 3.4% decline.

Earnings estimates for the current and next year have moved north in the past 30 days by 2% and 1%, respectively. This signifies that analysts are optimistic of the company’s future earnings growth, despite much apprehension surrounding the impact of a rising interest rate scenario and other ongoing headwinds. This bullish analysts’ sentiment justifies the company’s Zacks Rank #1 (Strong Buy) and the reason why we are expecting it to outperform in the near term. You can see the complete list of today’s Zacks #1 Rank stocks here.

What Makes PulteGroup a Solid Pick?

Prudent Land Acquisition Strategy: PulteGroup’s annual land acquisition strategies have resulted in improved volumes, revenues and profitability for quite some time now. Keeping in mind healthy housing market fundamentals, PulteGroup expects land acquisition spend to grow approximately 10% in 2018. In fact, over the past four-and-a-half years, PulteGroup invested more than $5 billion (as of Jun 30, 2018) in acquiring new land assets.

Given the company's improved profitability even after this considerable land investment, it now expects to generate between $900 million and $1.1 billion of cash in 2018 before dividends and share repurchase activities. This reflects an increase of $200 million from its prior guidance.

Impressive Expected Earnings & Revenue Growth: Apart from prudent land investments, the company has been undertaking initiatives to improve its operating and financial performance. These initiatives include improving overhead leverage, increasing inventory turns and implementing new pricing strategies, helping the company to drive profits. Earnings in the last reported quarter increased a solid 89.4% from the year-ago level.

The results benefited from higher demand, courtesy of positive U.S. housing market dynamics, backed by an improving economy and job market. Adjusted gross margin expanded 60 basis points (bps) year over year to 24% in the second quarter. Adjusted operating margin increased 180 bps to 13.2%.

PulteGroup has solid growth prospects, as is evident from the Zacks Consensus Estimate for its current-year earnings of $3.53 per share, which is expected to grow 61.2% year over year. Meanwhile, the company’s revenues are expected to increase by an impressive 17% in 2018. Moreover, its earnings and revenues are expected to increase 10.4% and 6.6% in 2019, respectively.

Overall, the company constitutes a great pick in terms of growth investment, supported by a Growth Score of A.

It also has a three-five year expected EPS growth rate of 19.4%.

Higher Return on Equity: PulteGroup’s trailing 12-month return on equity (ROE) supports its growth potential. ROE in the trailing 12 months was 20% compared with the industry’s 12.8%, reflecting the company’s efficient usage of shareholders’ funds.

Solid VGM Score: PulteGroup has a VGM Score of A. Our VGM Score identifies stocks that have the most attractive value, growth and momentum characteristics. In fact, our research shows that stocks with a VGM Score of A or B when combined with a Zacks Rank #1 or 2 (Buy) make solid investment choices.

Other Stocks to Consider

Other top-ranked stocks in the Zacks Construction sector include Century Communities, Inc. (CCS - Free Report) , D.R. Horton, Inc. (DHI - Free Report) and Beazer Homes USA, Inc. (BZH - Free Report) , each carrying a Zacks Rank #2.

Earnings for Century Communities, D.R. Horton and Beazer Homes are expected to increase 27.2%, 41.2% and 13.6%, respectively, for the current year.

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