Is the Sell-off in PulteGroup’s Stock a Knee-jerk Reaction?

With shares of PulteGroup (NYSE:PHM) trading at around $20.23, is PHM an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Q4 revenue came in at $1.57 billion, which exceeded the average expectation of $1.50 billion. This was also an increase of 24.6 percent year-over-year. EPS came in at $0.15 versus $0.04 for the same quarter last year. There continues to be strong cash flow generation, the company is focused on cost reduction initiatives, and there is rising demand. So was the stock down as much as 4 percent today?

Apparently, PulteGroup might have to buy back bad mortgages stemming from the subprime lending boom when there were little to no underwriting standards. Since this isn’t a guarantee, it shouldn’t be focused on too much. Even if this becomes a reality, then the news is already somewhat priced in.

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Getting back to Q4, new home orders increased 27 percent, homes sales increased 27 percent, home closings increased 20 percent, order backlog increased 65 percent, and there was a 320 basis point increase in adjusted gross margin to 21.8 percent. The financial services segment revenue also increased 54.5 percent year-over-year thanks to higher loan origination and increased gains on mortgage sales. As a side note, PulteGroup plans to invest $250 million per year on land and related development in 2013 and 2014.

Let’s take a look at some more important numbers prior to forming an opinion on the stock…

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