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Land Acquisition Strategy Bodes Well for PulteGroup (PHM)

Zacks Equity Research

PulteGroup Inc. PHM has been benefiting from prudent land acquisition strategies that have resulted in improved volume, revenues and profitability of late. Additionally, declining mortgage rates and improving demand trends along with strengthening overall housing market fundamentals are regaining optimism for the company.

Meanwhile, shares of PulteGroup have outperformed its industry in the past year. Its earnings estimates for 2019 and 2020 have also moved 0.9% and 0.6% north, respectively, over the past 30 days, signaling analysts’ confidence in the stock. The price performance is mainly backed by solid earnings surprise history, surpassing the Zacks Consensus Estimates in each of the trailing 10 quarters.





Recently, the company reported better-than-expected first-quarter 2019 results. Its top and bottom lines surpassed analysts’ expectation by 1% and 25.5%, respectively, and also increased year over year. The uptrend was mainly driven by above-mentioned tailwinds.

Let’s delve deeper into the factors that substantiate its solid first-quarter results and Zacks Rank #1 (Strong Buy).

Land Acquisition Strategy, A Catalyst: PulteGroup has been generating higher revenues and profitability over the past few quarters. Its land acquisition strategy emphasizes investing in shorter-lived smaller land assets while expanding the use of land option agreements when possible, thereby mitigating market risk.

In the first quarter, the company had approximately 149,000 lots under control, of which nearly 39% were controlled via option. In the said quarter, the company spent $305 million on land acquisition, up 5% from the year-ago period. Moreover, in 2019, it expects to spend approximately $1.2 billion in land acquisition plan.

Also, PulteGroup is maximizing the value of its land assets by selling houses at higher prices and better margins, thereby utilizing the strong cash flow to invest in the business, enabling to pay off debts and systematically return to its shareholders.

Solid Homebuilding Prospects: PulteGroup is benefiting from robust end-market demand and improving housing market prospects. Overall housing market fundamentals remain positive, backed by declining mortgage rates, steady job and wage growth, and moderate home prices, along with ongoing traffic trends, which indicate higher inclination of buyers and recovering industry. The convergence of healthy demand and low inventory levels are expected to boost new home sales in the near term.

Solid Cash Flow Management: PulteGroup has been vigorously managing its cash flow level, returning much of its free cash to investors through share buyback and dividend distribution. In the first quarter, the company returned nearly $56 million to its shareholders through dividends and share buybacks. It ended the quarter with $1.1 billion of cash and debt-to-total capital ratio of 38%, down from 42% at the end of last year.

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

Superior ROE: PulteGroup’s return on equity (“ROE”) supports its growth potential. The company’s ROE of 21.7% compares favorably with the industry’s average of 13%, implying that it is efficient in using its shareholders’ funds.

Other Key Picks

Some other top-ranked stocks in the same space are NVR, Inc. NVR, Taylor Morrison Home Corporation TMHC and M/I Homes, Inc. MHO. While NVR and Taylor Morrison currently sport a Zacks Rank #1, M/I Homes carries a Zacks Rank #2 . You can see the complete list of today’s Zacks #1 Rank stocks here.

NVR, Taylor Morrison and M/I Homes surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average beat being 17.6%, 38.7%, and 8.4%, respectively.

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