PulteGroup: Is it the best company in the sector?
Opdateret: 9. aug.
I keep searching for companies in sectors that I believe will perform well in the long term. One of the sectors is green energy. Most people are focused on companies within renewable energy, but unfortunately, most of those companies are trading at a very high valuation. Instead, I look for companies in different sectors, and I believe PulteGroup is one of them. In this analysis, you can read why.
This is not a financial advice. I am not a financial advisor and I only do these posts to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.
Since I have attended the workshop with Phil Town, I have decided to change the layout of my analyses a bit. I will do some more calculations and briefly go through why the company has meaning to me. If you want to read more about how I evaluate a company, please go to "MY STRATEGY" on my website.
For full disclosure, I should mention that at the time of writing this analysis, I do not own any shares in PulteGroup. If you would like to copy my portfolio or view the stocks in my portfolio, you can find instructions on how to do so here. I don't own shares in any of their direct competitors either. As always, I will keep this analysis unbiased. If you want to purchase shares or fractional shares in PulteGroup, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started with as little as $50.
PulteGroup is the third-largest home construction company in the United States and is headquartered in Atlanta, Georgia. Even though they are based in Atlanta, they operate in 24 different states. Since their founding in 1950, they have delivered more than 800.000 homes throughout the United States. PulteGroup predominantly sells single-family homes, as they represented 86% of their home closings in 2022. What I find very interesting about PulteGroup, though, is their strong focus on sustainability. Their new houses are now up to 30% more energy efficient than the average existing home. PulteGroup, besides homebuilding, also offers financial services, which account for about 2% of its revenue. Finding a moat in the home construction industry can be challenging due to the large number of companies operating in the sector. However, I do believe that a company that has been operating in the sector for more than 70 years and has grown to become the 3rd largest in the country has a brand moat, as the fact that consumers trust the brand, although the moat may not be as robust as we would prefer.
Their CEO is Ryan R. Marshall. He first joined PulteGroup in 2006 and became the CEO of PulteGroup in 2016. He hasspent his entire career at PulteGroup, where he has held various positions until he became CEO. He has a BA in Accounting from the University of Utah, an MBA from Arizona State University, and is a certified public accountant. His annual salary is $9,2 million, which is below the average for CEOs in companies with the market capitalizations of the size of PulteGroup, where the average is $11 million. However, he has become very wealthy due to owning a significant number of shares in PulteGroup. He has an interesting perspective on leadership, as he believes that leadership can be divided into three parts. Part one is to coach - teach, train, and hold people accountable. Part two is navigation - laying the destination of where to go and how to get there. Part three demolition expert - remove obstacles that prevent reaching the destination. He is very focused on the employees at PulteGroup, as evidenced by their report "A Culture of Sustainability & Excellence," which consistently emphasizes that the employees are the company's most valuable resource. PulteGroup has been ranked among the Fortune 100 Best Companies to work for in three consecutive years, climbing the list every year and reaching the 36th place in 2022. He has certainly done great as a CEO on the business side as well, delivering 23.107 homes in 2018, 23.232 in 2019, 24.624 in 2020, 28.894 in 2021, and 29.111 in 2022. All in all, it seems likePulteGroup has a great management team that owns a significant number of shares in the company, and they have the numbers to back up their success.
I believe that PulteGroup has somewhat of a brand moat. I really like the management too. Now let us investigate the numbers to see if PulteGroup lives up to our requirements for a strong moat. In case you want an explanation about what the numbers are, you can have a look at "MY STRATEGY" on the website.
The first number we will look into is the return on invested capital, also known as ROIC. We want to see 10 years of history, and we want the numbers to be above 10% in all years. Before we delve into the numbers, I must share a direct quote from the PulteGroup website: "PulteGroup operates against a stated objective of delivering high returns on investedcapital and equity over the housing cycle." And another one: "Consistent with our emphasis on generating high returns,our capital allocation priorities have been developed to create value for our shareholders." These statements speak right to my heart, as I always stress how important Return on Invested Capital (ROIC) is when you want to invest in a company. PulteGroup's ROIC shows the cyclicality of their sector, as some years have been underwhelming. However, it is nice to see that PulteGroup has managed to deliver a ROIC above 10% in the last five years.
The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actualnumbers and the percentage growth year over year. PulteGroup's equity follows the same pattern as ROIC, as we observeda decline in 2015, 2016, and 2017. Since 2018, PulteGroup has consistently increased their equity every year, which is a positive trend. Hopefully, PulteGroup will continue to deliver as they have over the past five years.
Finally, we will investigate the free cash flow. In short, free cash flow refers to the cash that a company generates after covering its operating expenses and capital expenditures. Levered free cash flow is the amount of money a company has remaining after paying all of its financial obligations. I use the margin to provide a clearer understanding. Free cash flow yield refers to the amount of free cash flow per share that a company is projected to generate in relation to its market value per share. PulteGroup has generated positive free cash flow in nine out of the past ten years, with only one year experiencing negative free cash flow, which occurred several years ago. It is curious to see that free cash flow, levered free cash flow margin, and free cash flow yield have all declined since 2020. This decline could be attributed to a challenging macroeconomic environment with soaring inflation. Nonetheless, I would like to see PulteGroup return to a trajectory of increasing their free cash flow in the future.
Another important aspect to investigate is a company's debt. We need to determine if the business has a manageable level of debt that can be paid off within 3 years. This can be calculated by assessing the long-term debt to earnings ratio. Basedon my calculation, PulteGroup has a debt-to-earnings ratio of 1,01 years. It is below the 3-year requirement, meaning that debt is not an issue when investing in PulteGroup.
Based on my findings thus far, it is evident that PulteGroup is a great company. However, no investments are without risk, and PulteGroup does have a few risks as well. One risk is higher interest rates. Higher interest rates affect housing sales as there will be people who can no longer afford new homes, while others may choose to stay on the sidelines due to overallmarket uncertainties and increased macroeconomic risks. Thus, U.S. new home sales fell by 16% in 2022, while the sales of existing homes dropped 18%. As higher interest rates result in higher home prices and mortgage rates, they have also had a significant impact on PulteGroup. Net new orders were down 27% in 2022 compared to 2021. Another risk is that PulteGroup operates in an industry with numerous competitors of varying sizes. Although PulteGroup is the third largest homebuilding company in the United States, yet their national market share is only around 5%. It shows that the U.S. housing industry is fragmented and highly competitive. PulteGroup competes with national, regional, and local homebuilders for each project. Furthermore, new home sales have traditionally represented less than 15% of the overall U.S. housing market. This means that PulteGroup not only competes with other new home sales, but also with sales of existing houses and rental providers. Another risk factor is that the homebuilding industry is cyclical. The residential homebuilding industry is sensitive to changes in economic conditions. If the United States experiences a prolonged recession, it could further decrease the demand for new houses, which would significantly impact the revenue and earnings of PulteGroup. In their annual report, PulteGroup mentions that the U.S. housing market was unfavorably impacted by the uncertainty in the global economy from 2006 to 2011. This resulted in significant losses for PulteGroup. Furthermore, some aspects of the housing industry have yet to return to the pre-2007 production levels.
There is also plenty of potential in PulteGroup as an investment. President Joe Biden's Clean Energy Plan. In his clean energy plan, Joe Biden has a section dedicated to housing, which aims to stimulate the construction of 1,5 million sustainable homes and housing units. In 2023, President Biden remains committed to addressing housing issues. TheBiden Administration has recently unveiled new initiatives and funding to reduce energy expenses and enhance theenergy efficiency and climate resilience of affordable housing. The new actions mainly focus on providing tax credits for the installation of energy-saving equipment in existing homes. However, the Biden Administration has previously stated its commitment to investing $640 billion over 10 years to ensure that every American has access to affordable, stable, safe, and healthy housing that is also energy efficient and resilient. You ought to think that it also includes new homes, where PulteGroup excels in making energy-efficient houses. The U.S. has a housing deficit. From 2010 to 2022, the population of the United States increased by 25 million. In the same period, housing starts averaged only 1,1 million annually, which is lower than the estimated need for 1,5 million new housing starts. It means that the United States is experiencing a housing deficit of several million homes. Furthermore, the 72 million people who comprise the Millennial generation are now entering the prime homebuying age. Thus, the long-term outlook for the U.S. housing market appears strong. PulteGroup is shareholder-friendly. PulteGroup is a company that prioritizes the interests of its shareholders. In 2022, PulteGroup repurchased $1,1 billion worth of shares, which accounted for 9,4% of their diluted shares outstanding. PulteGroup has just approved another $1,2 billion repurchase program. PulteGroup has historically engaged in share buybacks. From 2013 to 2022, PulteGroup repurchased 45% of its outstanding shares. Furthermore, they have also paid out $1,1 billion in dividends in the same period.
All right, we have gone through the numbers, potential and risk regarding PulteGroup, and now it is time for us to calculate a price for PulteGroup. In order to calculate price, we will need the numbers that I have explained in the "MY STRATEGY" section of the website, as I do not want to go through the whole calculation here. I chose to use an EPS as it was in 2022 at 11,01. I have chosen an estimated future EPS growth rate of 10% (In the last 4 years, it has grown at a CAGR of 33%, but we do see some macroeconomic challenges, so I prefer to be conservative). The estimated future PE is 20 (which is double the growth rate, as the historical PE for PulteGroup has been higher). Additionally, we already have the minimum acceptable return rate of 15%. Doing the calculations, we come up with the sticker price (some call it fair value or intrinsic value) of $141,18. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy PulteGroup at a price of $70,59 (or lower, obviously) if we use the Margin of Safety price.
Our second way to calculate a buy price is the Ten Cap price, which is also explained at "MY STRATEGY". To do so, we need some numbers from their financial statements, keep in mind that all numbers are in millions. The operating cash flow last year was 668 The capital expenditures were 113. I tried to look through their annual report to see how much of the capital expenditures were used on maintenance. I couldn't find it, though, so as a rule of thumb, you can expect 70% of the capital expenditures to be used for maintenance. This means that we will use 79 in our further calculations. The tax provision was 822. We have 225,84 outstanding shares. Hence, the calculation will be as follows:(668 - 79 + 822) / 225,84 x 10 = $62,48 in Ten Cap price.
The last calculation is the Payback Time. I also described in "MY STRATEGY". With PulteGroup's Free Cash Flow Per Share at 2,42 and a growth rate of 10%, if you want to recoup your purchase in 8 years, the Payback Time price is $40,01.
I believe that PulteGroup is a great company with excellent management. PulteGroup may face challenges due to macroeconomic concerns, and these challenges may last longer than expected, as we saw between 2006 and 2011. I believe that the competitive landscape is a long-term trend for PulteGroup, as they are facing a wide range of competition. However, PulteGroup has been operating for more than 70 years, so I am confident that they will be able to effectivelydeal with this competition. Furthermore, PulteGroup mentioned that they may be able to take market shares due to the disruptions among the regional banking sector, as PulteGroup can self-fund or have access to capital that smaller builders typically cannot match. Looking long-term, I believe that PulteGroup has plenty of room to grow. As the population grows, so does the need for housing. I also believe that people will be more inclined to choose energy-efficient housing moving forward. I also like that PulteGroup has been shareholder-friendly throughout its history. The fact that they have decreased the number of shares outstanding by 45% in the last ten years has unlocked tremendous value for shareholders. I don't know if now is the right time to buy PulteGroup due to the cyclical nature of the company, and I'm probably going to stay on the sidelines for now. However, buying PulteGroup below the Ten Cap price at $62,48 may be a good idea if you are ready to hold for the long term.
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