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PulteGroup Looks Substantially Undervalued

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GuruFocus.com
·2 min read
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- By Nicholas Kitonyi

Shares of residential construction company PulteGroup Inc. (NYSE:PHM) fell 11% this week. The Atlanta-based company announced its fiscal fourth-quarter results on Wednesday after the market closed.

PulteGroup Looks Substantially Undervalued
PulteGroup Looks Substantially Undervalued


The stock fell nearly 8% following the announcement despite posting an impressive quarter that beat analysts' expectations on revenue and earnings. Shares of the company are still up more than 145% since bottoming on March 23. However, PulteGroup has now lost 2.58% in market value over the last 12 months following this week's pullback.

Highlights from recent quarterly results

PulteGroup posted adjusted earnings per share growth of 30.70% to $1.49, compared to $1.14 reported in the same period a year ago. This was better than the consensus analyst expectation of $1.40.

Revenue for the quarter also surged 5.80% higher to $3.19 billion, which again outperformed estimates of $3.13 billion.

PulteGroup President and CEO Ryan Marshall attributed the company's strong quarterly performance to the ongoing recovery of the housing market.

"Fourth quarter operating and financial results attest to the ongoing strength of the housing market as we generated 24% growth in net new orders, realized a 220 basis point increase in gross margin, and generated more than $500 million of operating cash flow in the period," he said.

The company's full-year revenue grew to $10.58 billion, up from $9.92 billion reported in 2019. Diluted earnings per share came in at $5.18 compared to $3.66 reported in the previous year. PulteGroup increased the quarterly dividend by 16.67% to 14 cents per share, up from 12 cents paid in the same period a year ago. The company also increased the annual dividend by 11.11% to 50 cents.

Valuation

From a valuation perspective, shares of PulteGroup are trading at a trailing price-earnings ratio of 9.08. This indicates a potential case of undervaluation based on the Peter Lynch fair value of 15.

The company's valuation multiples also compare positively to close peers. Skyline Champion Corp. (NYSE:SKY) trades at a trailing price-earnings ratio of 36.48, while NVR Inc.'s (NYSE:NVR) equivalent is 19.38. On the other hand, Arizona-based Cavco Industries Inc. (NASDAQ:CVCO) is valued at a price-earnings ratio of 27.11.

Looking forward, PulteGroup's forward price-earnings ratio of 6.39 is also better than Skyline's 25.36. On the other hand, NVR's equivalent is 11.90 while Cavco Industries' is 21.48.

In summary, PulteGroup appears to be substantially undervalued compared to close peers. The company's current price-earnings ratio is also significantly below the Peter Lynch fair vale. The latest pullback may be an opportunity to buy the stock.

Disclosure: No positions in the stocks mentioned.

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This article first appeared on GuruFocus.