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…

E = Equity to Debt Ratio Is Weak  

A high debt-to-equity ratio might be normal for the industry, but PulteGroup is in worse shape than the two competitors listed below. The balance sheet is also negative. However, cash flow is good.

Debt-To-Equity

Cash

Long-Term Debt

PHM

1.46

$1.50 Billion

$3.10 Million

TOL

0.72

$1.27 Billion

$2.25 Billion

LEN

1.15

$1.48 Billion

$4.01 Billion

 

T = Technicals on the Stock Chart Are Strong  

PulteGroup has outperformed Toll Brothers Inc. (NYSE:TOL) and Lennar Group (NYSE:LEN) by a wide margin over the past year.

1 Month

Year-To-Date

1 Year

3 Year

PHM

19.55%

15.86%

175.80%

100.00%

TOL

19.35%

15.43%

68.34%

102.10%

LEN

10.55%

7.55%

88.58%

176.80%

 

At $20.23, PulteGroup is currently trading above all its averages.   

50-Day SMA

18.18

100-Day SMA

17.25

200-Day SMA

13.81

 

E = Earnings Have Been Improving     

Earnings haven’t been impressive over the past five years, but they have been improving. On the other hand, revenue hasn’t been as consistent, and revenue is more important than earnings because it’s more difficult to manipulate.  

2007

2008

2009

2010

2011

Revenue ($)in billions

9.26

6.26

4.08

4.57

4.14

Diluted EPS ($)

-8.94

-5.81

-3.94

-2.90

-0.55

 

We already know what happened this quarter. Now let’s take a look at previous quarters.

9/2011

12/2011

3/2012

6/2012

9/2012

Revenue ($)in billions

1.14

1.26

881.04M

1.07

1.30

Diluted EPS ($)

-0.34

0.04

-0.03

0.11

0.30

 

T = Trends Support the Industry

The word on the street is that there is a stabilizing recovery in the housing market. The word “stabilizing” might be a bit on the optimistic side if we’re talking about long-term, but for now it’s an accurate description. The key factors are record low interest rates, it being more affordable to own a home than to rent right now, rising home prices, and much lower inventory. In regards to rising home prices, the average sale price of a home is up 6 percent year-over-year.

Conclusion

PulteGroup has some hurdles ahead. The biggest potential hurdle would be a trend change throughout the industry. If people continue to buy homes, then home prices will continue to rise. When this happens, fewer people will be interested in buying a home because there won’t be as many cheap homes available. The consumer isn’t strong enough to keep up with increasing home prices. Therefore, there is a cap on the industry’s potential. In the meantime, the trend is your friend, and the trend for homebuilders is up. Therefore, PulteGroup is an OUTPERFORM.

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