PHM - PulteGroup: A Prudent Choice For Growth-Oriented Investors

2023-05-05 04:15:30 ET

Summary

• PulteGroup operates primarily in the US homebuilding market.
• Over the past month, its stock price increased by 15.2% compared to the industry's 12.8%.
• This solid performance was fueled by the company's strong growth levers, which will fuel its long-term upward trajectory.

Investment Thesis

PulteGroup, Inc. (PHM) operates primarily in the US homebuilding market through its subsidiaries. Over the past month, PHM stock price increased by 15.2%. The Home Builders industry, to which it belongs, increased by 12.8% during the period in question; this is a positive indicator that it has outperformed its industry.

Its stock price has increased by over 52% in the past year, demonstrating a solid performance over time. The company's robust growth levers are largely responsible for its impressive performance. I think its solid financial standing has also contributed to this performance. The company has a debt load of $2.46B and a market cap of $14.68B. Low debt is a positive sign that his company is not being held hostage by its debt and that the debt risk is low.

Optimism about the company's future growth is warranted by its numerous growth drivers, but investors should be aware of the threat posed by the sector. Inflation is one of these risks.

Company Overview

PulteGroup Inc., based in Atlanta, Georgia, is a company that operates mainly in the United States. Homebuilding (which accounted for 98.1% of total sales in 2022) and Financial Services (1.9% of total revenues) are the company's two key business sectors.

In 2022, the company served 810 communities in 42 markets across 24 states. Six distinct regions are tracked in the home building industry reports: the Northeast, the Southeast, Florida, Texas, the Midwest, and the West.

Through Pulte Mortgage and other subsidiaries, it conducts business in the financial services sector, including mortgage banking and title operations. For homebuyers, Pulte Mortgage provides finance by creating mortgage loans.

In the first quarter of 2023, the company took orders for 8,898 homes, more than the 8,767 houses it took orders for in the same quarter the year before. The backlog at the end of the quarter was 13,129 homes, down from 19,935 homes in the same quarter last year.

Growth Drivers

PHM has been doing very well, attributed to the following robust growth drivers.

Sustainability

The company is integrating cutting-edge green efforts by testing and implementing new technologies that improve energy efficiency, use environmentally friendly products, and mainstream sustainability in neighborhoods around the United States.

The Altus at the Quarter neighborhood in Atlanta is home to the city's first "Smart Neighborhood," which is being developed in collaboration with a local business. Enhanced insulation, cutting-edge heating and cooling systems, LED lighting, and a greater efficiency electric heat pump water heater are some of the energy-efficient building elements that are standard in homes in the Smart Neighborhood. Each home will come included with PulteGroup's Smart Home package, allowing buyers to outfit their residence with cutting-edge technology that can be operated by voice or touch. Smart home technology from PulteGroup not only makes homeowners' lives easier but also saves money and improves energy efficiency, according to research.

A dedication to sustainability shows that the company has a forward-thinking persona and is responsive to shifting consumer tastes, which are good signs for investors.

Land Acquisition Strategy

PHM's plans for purchasing land annually focus on increasing production, sales, and profits. The corporation invested $4.5 billion in land purchase and development in 2022 and $4.2 billion in 2021. The land strategy includes increasing the use of land option agreements and investing in shorter-term, smaller land assets to reduce exposure to market volatility.

PHM forecasts a significant decrease in land spending in 2023 due to shifting buyer preferences. In 2023, the firm forecasts a decrease in land acquisition and development spending to around $3.3 billion. It anticipates that 65 percent of these funds will be used for developing land positions that are already owned. Company leaders hope to boost ROI by slowing down land spending, ramping up the utilization of land options, and speeding up inventory turnover.

First-Time/Entry-Level Buyers

Given the ongoing affordability concerns in the US housing market, PHM prioritizes meeting the rising demand for entry-level homes, which target lower-priced homes. The company's strategic measures to increase profitability have been fruitful, resulting in positive financial results. It's promising to see the percentage of first-time buyers rising in response to these plans of action. In the fourth quarter of 2022, first-time buyers made up 36% of closings, move-up purchasers accounted for 39%, and active adults made up 25%. In the last three months of 2021, there were 33% first-time buyers, 42% upsizers, and 25% working-age adults. As part of its growth strategy, the company is shifting its focus from mixed to first-time buyers.

Rapid Community Openings

The corporation recently announced openings of new communities. On March 16, the company introduced The Trails at Belmond, a new neighborhood in Louisville. It announced its entry into the Greenville market with three new Pulte Homes communities on March 8. Indigo Park, located in Easley, will be the first to open sometime this summer. In late 2023, residents of the second neighborhood will be able to move into Briarwood Reserve in Spartanburg. Lastly, Alston Park in Greenville is scheduled to open in the first few months of 2024.

Driving Shareholder Value

For almost 40 years, PHM has been paying quarterly dividends. It has prioritized maintaining a sound financial position and distributing cash flows to shareholders. It announced a quarterly dividend increase in December 2022, increasing it by 7% to 16 cents per share.

PHM paid quarterly cash dividends of $143.1 million in 2022, up from $148.1 million in 2021. In addition, in 2022, it repurchased 24.2 million shares for $1.1 billion; in 2021, it repurchased 17.7 million shares for $897.3 million. On January 31, 2022, the company's Board of Directors authorized an additional $1 billion to be spent on repurchasing existing shares. As of the end of 2022, the company has a remaining authorization of $382.9 million.

Valuation

According to the most recent financial data, PHM is worth 5.73 times its annual earnings. This is lower than the average P/E for companies in its industry, which stands at 15.37, indicating that the stock is underpriced. This affords shareholders a chance to buy the stock at a discount. In addition, the company's strong growth levers suggest its valuation will rise, allowing investors to earn a larger total return than just the dividend increases they've received.

Risks

Even though PHM has done well and has promising growth levers, there are some risks that investors should be aware of. The weak orders and backlog numbers come first. In the fourth quarter of 2022, net new orders totaled 3,964 residences, down 41% from the previous year's period. The drop results from several challenges, including sluggish demand, rising mortgage rates, declining affordability, and declining consumer confidence. Also, a significant rise in cancellations impacted net new orders during the quarter. Compared to the third quarter of 2022's cancellation rate of 24% and the previous quarter's rate of 11%, the fourth quarter's cancellation rate of 32% was substantially higher.

The rising inflation rate is another concern. Higher labor and land prices are putting pressure on margins since they reduce homebuilders' ability to charge more. Since fewer workers are available, wages and land prices are rising. Rising commodity costs also impact the corporation's performance due to the paucity of input resources. Inflation in raw materials is eating away at homebuilders' profit margins.

Conclusion

In summary, PHM is a prudent choice for a variety of reasons. The company is in good financial shape, undervalued compared to its competitors, and committed to innovation and sustainability. In addition, the US housing industry is anticipated to expand in the coming years, giving the organization a chance to keep growing. PHM is a good option for investors searching for a long-term investment with growth potential but keep inherent and systemic risks in mind.

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