Why I just opened a position in PulteGroup
Opdateret: 3. maj
I keep looking for companies in sectors that I believe will do good in 2021 and onwards. 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 post in order 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 also 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.
If you regularly read my posts, you would know that I often write about Joe Biden's clean energy plan. Many people think that the clean energy plan is only about renewable energy but that isn't so. His clean energy plan covers different areas and one of them is what he calls "Housing". It doesn't say in details what his plan is but his plan states that it will "spur the construction of 1,5 million sustainable homes and housing units". Looking deeper into his politics, his websites states that "Joe Biden 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....". Obviously, what caught my eye was energy efficient, as it draws a direct line to his clean energy plan. It was made me interested in sustainable home builders to begin with and what made me aware of PulteGroup.
So who is PulteGroup? It 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 23 different states. Since their founding in 1950, they have delivered almost 750.000 homes throughout the Unites States. 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. 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 actually below the average for CEO's in companies with the market capitalizations of the size of PulteGroup, where the average is $11 million. However, he has become very whealthy 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. He certainly has done great as a CEO on the business side as well, delivering 23.107 homes in 2018, 23.232 in 2019 and 24.624 in 2020. 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.
We have determined that PulteGroup has somewhat of brand moat. We really like the management as well. Now let us look into the big five numbers in order to see, if PulteGroup does live up to our requirements for a strong moat. In case you want an explanation about what the big five 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 of the benchmarks. 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 has a great ROIC and meet the requirements in all benchmarks besides one. The one that is missing, is one of the older benchmarks and is so close that it isn't of any concern.
The next numbers we will look into are the Sales Growth Rates. Ideally the numbers should be above 10% in each benchmark and increasing. In general the sales growth rate is solid in all of the benchmarks. Even though they do not meet the requirement in the two newest and the oldest benchmarks, I will not be concerned as they are by no means bad.
The next numbers are the EPS Growth Rates. As with all other growth rates we want the numbers to be above 10 % in all benchmarks. All right, we have one bad benchmark that is one of the older benchmarks. The rest of the benchmarks are not only great, they are fantastic . Obviously, looking at all of the benchmarks combined the results are great and I'm not worried about a single benchmark being bad.
The Equity Growth Rate in all benchmarks are great once again. Sure, you have a few benchmarks that are a bit underwhelming but if you look at the latest benchmarks it is hard not to get excited. Once again PulteGroup delivers good numbers, especially in the newest benchmarks.
Finally we look into the Cash Growth Rates. The two oldest benchmarks do meet the expectations of more than 10 %. Looking at the three newest benchmarks, the numbers are fantastic and if that is something that could continue, I think that everyone that is invested in PulteGroup would be very happy.
To sum up the five numbers. The most important number will always be the ROIC, and the numbers are just very solid, and I cannot help to be a bit excited about them stressing on the website that they have an objective of delivering a high ROIC. They have certainly lived up to their objective so far. Looking at the four growth rates they are great to fantastic. Sure, there are some benchmarks where they do not meet the requirements but if you look at the numbers overall, you would be very happy. Based on the numbers alone, I believe that PulteGroup would be a very good investment.
Another important thing to look into is debt, and we want to see if a business has a reasonable debt that can be paid off within 3 years. We do so by dividing the total long-term debt by current cash flow. Doing the calculation on PulteGroup, I can see that PulteGroup has 2,25 years earnings in debt, which is acceptable.
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 of the greatest risks are they 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 3 %. Meaning there will be competitors to every job, and PulteGroup needs to continue to deal with this, as they have for the last 70 years. Another risk factor is that the homebuilding industry is cyclical, meaning that if we see downward trends in the general economy, it could hurt a business like PulteGroup. It could very well be something we will see in a post pandemic world. Obviously, there are other risk factors as well but I thought these are the greatest risk factors PulteGroup is facing: Competitors and the general economy.
In the beginning of the this post I wrote that I believe that PulteGroup will benefit from Joe Biden's climate plan. But even if it isn't so, they might benefit from some of his other policies. Joe Biden has proposed to offer a permanent tax credit of $15.000 for anyone making a down payment on their mortgage, which should increase the demand of homes to own. It could very well benefit PulteGroup, as 85 % of their home closings are single -family detached homes.
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 a EPS as it is now at 5,19. I chose a Estimated future EPS growth rate of 6 (which is a bit lower then the analyst consensus growth rate), Estimated future PE 12 (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 $27,57, 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 $13,78 (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". In order 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 1.784,34 The Capital Expenditures was 58,35. I tried to look through their annual report to see, how much of the capital expenditures were used on maintenance. I wasn't able to 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 40,85 in our further calculations. The Tax Provision was 321,86. We have 265,89 outstanding shares. Hence, the calculation will be like this: (1.784,34 - 40,85 + 321,86) / 265,89 x 10 = $77,68 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 5,05 and a growth rate of 6 %, if you want your purchase back in 8 years, the PAYBACK TIME price is $52,98.
I do believe that PulteGroup is a great company with a great management. I believe they will do good in the future, as I believe in a bright future for energy efficient houses. There are some slight concerns about how strong the moat is, and you need to be aware of how the general economy will look in a post pandemic world. However, based on my findings in this analysis, I did actually open a position at a price that was below Pay Back price at $52,98. I would be very comfortable at opening a position at this price, as two out of three calculations show that you get a 50 % discount to intrinsic value.
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