PulteGroup: Is it the best company in the sector?

I keep looking for companies in sectors that I believe will do good 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 value. Instead, I look for companies in other sectors, and I think one of them is PulteGroup. 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 shares in PulteGroup. If you would like to copy my portfolio or see the stock in my portfolio, you can read about 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.

PulteGroup is the 3rd largest home construction company in the United States and is based in Atlanta, Georgia. Even though they are based in Atlanta, they are operating in 24 different states. Since their founding in 1950, they have delivered more than 800.000 homes throughout the Unites States. PulteGroup predominantly sell single-family homes, as they represented 86 % of their home closings in 2022. What I find very interesting about PulteGroup though is that they are very focused on sustainability, and their new houses are now up to 30 % more energy efficient than the average existing home. Besides homebuilding, PulteGroup also offers financial services, which about 2 % of revenue. Finding a moat in a home construction company is a bit difficult, as there are so many companies that operates in the sector. However, I do believe that a company that could operate in the sector for more than 70 years and grow to the 3rd largest in the country has a brand moat, as the consumers obviously trust the brand, even though the moat may not be as strong as we would like.

Their CEO is Ryan R. Marshall. He first joined PulteGroup in 2006 and became the CEO in PulteGroup in 2016. He has spent his entire career in PulteGroup, where he has held various positions until he became CEO. He has BA in accounting from the University of Utah, a MBA at the 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 quite a lot of shares in PulteGroup. He has an interesting take on leadership, as he says he thinks about leadership in three parts. Part one is coach - teach, train, and hold people accountable. Part two is navigator - laying the destination of where to go and how to get there. Part three demolition expert - remove obstacles that prevents reaching the destination. He is very focused on the employees in PulteGroup, which their report "A Culture of Sustainability & Excellence" is a proof of, as the report often stress that the employees at PulteGroup is the company's most precious resource. It seems like employees as PulteGroup has been ranked among Fortune 100 Best Companies to work for in three consecutive years, climbing the list every year and reached the 36th place in 2022. He certainly has 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 like PulteGroup has a great management that owns a lot of shares in the company, while they have the numbers to back it up.

I believe that PulteGroup has somewhat of brand moat. I really like the management as well. Now let us investigate the numbers to see, if PulteGroup does live 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 investment 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 go into the numbers, I must share something directly quoted from the PulteGroup website: "PulteGroup operates against a stated objective of delivering high returns on invested capital 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 ROIC is, when you want to invest in a company. PulteGroup's ROIC shows the cyclicality of their sector, as some years has been underwhelming. However, it is nice to see that PulteGroup has managed to deliver a ROIC above 10 % in the last five years.

The next numbers are the book value + dividend. In my old format this was known as the equity growth rate. It was the most important of the four growth rates I used to use in my analyses, which is why I will continue to use it moving forward. As you are used to see the numbers in percentage, I have decided to share both the numbers and the percentage growth year over year. PulteGroup's equity follows the same pattern as ROIC, as we saw a decline in 2015, 2016, and 2017. Since 2018 PulteGroup has grown their equity every year, which is nice to see. Hopefully, PulteGroup will continue to deliver as they have in the last five years.

Finally, we investigate the free cash flow. In short, free cash flow is the cash a company generates after it has paid for operating expenses and capital expenditures. Levered free cash flow is the amount of money a company has left remaining after paying all of its financial obligations, I use the margin for it to make more sense. Free cash flow yield is the free cash flow per share a company is expected to earn against its market value per share. PulteGroup has delivered a positive free cash flow in nine out of ten years, and the year with negative free cash flow is many 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 but it can have something to do with a tough macroeconomic environment with inflation soaring. Nonetheless, I would like to see PulteGroup getting back to growing their free cash flow moving forward.

Another important thing to investigate is debt, and we want to see if a business has a reasonable debt that can be paid off within 3 years by calculation long-term debt to earnings. Doing the calculation on PulteGroup, I can see that PulteGroup has 1,01 years earnings in debt. It is below the 3 years requirement, meaning that debt is not an issue if investing in PulteGroup.

Based on my findings so far, it is obvious that PulteGroup is a great company. However, no investments are without risk and PulteGroup do have a few risks as well. One risk is higher interest rates. Higher interest rates affect housing sales as there will be people that can no longer afford new homes, while other people move to the sidelines as because of the overall market 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 the higher interest rates results in higher home prices and higher mortgage rates, it also significantly affected PulteGroup, as net new orders were down 27 % in 2022 compared to 2021. Another risk is that they operate in an industry with a lot of competitors of different sizes, PulteGroup is the 3rd 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. Thus, PulteGroup competes with national, regional, and local homebuilders for each job. Furthermore, new home sales have traditionally represented less than 15 % of the overall U.S. home sales, meaning that PulteGroup also competes with sales of existing houses and any providers of rental houses. Another risk factor is that the homebuilding industry is cyclical. The residential homebuilding industry is sensitive to changes in economic conditions. If we see a long recession the United States it could decrease the demand for new houses further, which as a result would significantly decrease the revenue and earnings of PulteGroup. In their annual report, PulteGroup mentions that the U.S. housing market was unfavorable impacted by the uncertainty in the global economy from 2006 to 2011, which resulted in significant losses for PulteGroup and that some aspects of the housing industry have yet to return to the pre-2007 production levels.

There are 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 called housing, which should spur the construction of 1,5 million sustainable homes and housing units. In 2023, President Biden is still focused on housing, as the Biden Administration has announced new actions and investments to lower energy costs and make affordable homes more energy efficient and climate resilient. The new actions mainly focus on tax credits to install energy saving equipment to existing homes, but the Biden Administration has previously said that they will invest $640 billion over 10 years so every American has access to housing that is affordable, stable, safe, and healthy, accessible, energy efficient and resilient. You ought to think it also includes new homes, where PulteGroup excels in making energy efficient houses. The U.S. has housing deficits. 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 compares with an estimated need for 1,5 million new housing starts. It means that the United States faces a housing deficit of several million homes. Furthermore, the 72 million people that compromise the generation Millennials are now entering the prime homebuying age. Thus, the long-term outlook for the U.S. housing market looks strong. PulteGroup is shareholder friendly. PulteGroup is a very shareholder friendly company. In 2022 PulteGroup repurchased $1,1 billion shares, which was 9,4 % of their diluted shares outstanding. And PulteGroup has just approved another $1,2 billion repurchase program. PulteGroup has historically bought back shares and from 2013 to 2022, PulteGroup has repurchased 45 % of their 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 chose an Estimated future EPS growth rate of 10 (In the last 4 years, it has grown by a CAGR at 33 % but we do see some macroeconomic challenges, so I prefer to be conservative), Estimated future PE 20 (which the double of the growth rate, as the historically PE for PulteGroup has been higher) and we already have the minimum acceptable return rate on 15 %. Doing the calculations by using the formula I described in "MY STRATEGY" we come up with the sticker price (some call it fair value or intrinsic value) of $141,18, and we want to have a margin of safety on 50 % so we will divide it by 2, meaning that we want to buy PulteGroup at 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 was 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 expect 70 % of the capital expenditures to be used on maintenance, meaning we will use 79 in our further calculations. The Tax Provision was 822. We have 225,84 outstanding shares. Hence, the calculation will be like this: (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 the Free Cash Flow Per Share at 2,42 and a growth rate of 10 %, if you want your purchase back in 8 years, the PAYBACK TIME price is $40,01.

I do believe that PulteGroup is a great company with a great management. PulteGroup may face some challenges due to macroeconomic concerns, and these macroeconomic challenges may be much longer than expected as we saw in the period between 2006 and 2011. I believe that competitive landscape is more of a long-term trend for PulteGroup, as they are facing a wide range of competition, but so far PulteGroup has been operating for more than 70 years, so I believe that PulteGroup will manage to deal with 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 population grows, so do 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 history and having decreased shares outstanding 45 % the last ten years has unlocked a tremdous 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 but 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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