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PulteGroup: Is it the best company in the sector?

Opdateret: 21. apr.


Many people may not know that PulteGroup is the third largest homebuilder in the United States. The homebuilding industry is cyclical, which may deter some investors. However, it may be a mistake as PulteGroup still has ways to grow and is one of the most shareholder-friendly companies that I know.


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. PulteGroup primarily engages in the homebuilding business in the United States. It acquires and develops land primarily for residential purposes and constructs housing on such land. The company also offers various home designs, including single-family detached homes, townhomes, condominiums, and duplexes under the brand names Centex, Pulte Homes, Del Webb, DiVosta Homes, John Wieland Homes and Neighborhoods, and American West. The company also arranges financing through the origination of mortgage loans primarily for homebuyers, sells the servicing rights for the originated loans, and provides title insurance policies, examination, and closing services to homebuyers. Homebuilding generated 98% of PulteGroup's revenue in 2023, while its financial services generated 2% of the revenue. PulteGroup's sales prices of home closings during 2023 ranged from approximately $150.000 to over $2.500.000, with 86% falling within the range of $250.000 to $750.000. The average unit selling price in 2023 was $545.000. PulteGroup delivers some of the industry's highest gross and operating margins, which were 29,3% and 20,9% in 2023, respectively. 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 moat, given that consumers trust the brand, even though the moat may not be as strong as we would prefer. However, PulteGroup is expanding its competitive advantages. For instance, in 2023, they introduced a rate buydown program that could potentially reduce a homebuyer's mortgage rate by up to two full percentage points for the entire 30-year life of the mortgage.

The CEO is Ryan R. Marshall. He first joined PulteGroup in 2006 and became the CEO in 2016. He has spent his entire career at PulteGroup, where he has held various positions before becoming 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 market capitalizations similar to 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 - to teach, train, and hold people accountable. Part two is navigation - determining the destination and the route to reach it. Part three: Demolition expert - removing 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 four consecutive years. He has certainly excelled as a CEO on the business side, delivering 23.107 homes in 2018, 23.232 in 2019, 24.624 in 2020, 28.894 in 2021, 29.111 in 2022, and 28.600 in 2023. However, the performance in 2023 was affected by high mortgage rates and other macroeconomic factors. All in all, it seems that PulteGroup has a strong management team that holds a substantial number of shares in the company, and they have the data to support their success. Thus, I am confident in Ryan R. Marshall leading the company in the future.

I believe that PulteGroup has somewhat of a moat, which is expanding. I really like the management as well. Now, let us investigate the numbers to see if PulteGroup meets our criteria 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 a 10-year history, with all numbers exceeding 10% in each year. Before we delve into the numbers, I must share a direct quote from the PulteGroup website: "PulteGroup operates with the stated objective of delivering high returns on invested capital and equity throughout 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 resonate with me, as I consistently emphasize the significance of Return on Invested Capital (ROIC) when considering investments in a company. PulteGroup's Return on Invested Capital (ROIC) demonstrates the cyclicality of their sector, with some years being underwhelming. However, it is nice to see that PulteGroup has managed to deliver a Return on Invested Capital (ROIC) above 10% in the last six years and above 20% in the past two years, despite being affected by various macroeconomic factors.



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 actual numbers and the year-over-year percentage growth. PulteGroup's equity follows the same pattern as ROIC, as we observed a decline in 2015, 2016, and 2017. Since 2018, PulteGroup has consistently increased its equity every year, which is a positive trend. It is also worth noting that not only has the equity increased every year, but the increase has also been above 10% in all years, which is very encouraging.



Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins offer a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected 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. Free cash flow was slightly underwhelming in 2021 and 2022, but PulteGroup managed to reverse that trend and deliver its highest free cash flow ever in 2023, which is very encouraging. Levered free cash flow margin hasn't reached previous heights, but PulteGroup managed to deliver its third-highest levered free cash flow margin in 2023, which is another encouraging sign. Especially when compared to the two previous years. The free cash flow yield is also at its third-highest level in the past decade, at 9,5%. This suggests that PulteGroup is trading at a cheap valuation, but we will revisit that later in the analysis.



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. Based on my calculation, PulteGroup has a debt-to-earnings ratio of 0,95 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 macroeconomics. A series of interest rate increases began in 2022, ultimately raising the Federal Funds Rate tenfold and pushing 30-year mortgage rates from 3,2% in 2022 to a cycle peak of approximately 8,0% in October 2023. While such dramatic increases in mortgage rates make homebuying more difficult for consumers, the U.S. home sales reached their lowest levels in 30 years in 2023. The high mortgage rates are affecting home sales in a significant way. More than 80% of all outstanding mortgages now have a rate of 4% or lower. Currently, mortgage rates are significantly higher. Existing homeowners are "locked in" to their current mortgages and are financially unable or emotionally unwilling to sell their homes because the increase in monthly payments would likely be significant. Thus, people who already own homes are unwilling to buy new ones. Another risk is that PulteGroup operates in an industry with numerous competitors of different sizes. Although PulteGroup is the third-largest homebuilding company in the United States, 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 competes not only with other new home sales but also with sales of existing houses and rental providers. Another risk factor is the cyclical nature of the homebuilding industry. 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. The U.S. has a housing deficit. The mathematics related to the U.S. housing industry is as clear as it is convincing for PulteGroup. Industry experts suggest that due to population growth and product obsolescence, the housing industry needs to start building approximately 1,5 million homes annually to meet the country's housing demand. Relative to this figure, residential new construction has fallen short by a total of 4,9 million homes over the past 20 years. Furthermore, the 72 million people who comprise the Millennial generation are now entering the prime home-buying age. Thus, the long-term outlook for the U.S. housing market appears strong. Several growth factors. PulteGroup recently announced their entry into the state of Utah, marking their expansion into new markets. This is just their newest market, as they have leveraged established operating teams to enter a number of adjacent markets over the past few years, including the Triad area of North Carolina; Greenville and Columbia, South Carolina; Denver, Colorado; and Portland, Oregon. PulteGroup controlled 223.000 lots at the end of 2023, of which 53% were held via land options that give PulteGroup the right to purchase the underlying lots at a predetermined future time and price. Structured properly, such options can enhance returns and, equally important, help mitigate market risk. PulteGroup aims to increase the percentage of controlled land owned through land options to reach approximately 70%. This strategy is considered a lower-risk model that is less capital-intensive, ultimately leading to improved margins. Finally, PulteGroup aims to reduce the construction cycle from 135 days to 100 days, which will lower the cost of building homes and enhance profitability. Shareholder-friendly. Management has mentioned that their focus is always on investing in the business to build shareholder value. They emphasized that to accomplish this goal, they must continue to intelligently invest in high-quality and high-returning projects, while also investing in the company's assets through the ongoing repurchase of its stock. PulteGroup initiated its buyback program in 2013 and has repurchased approximately 50% of its shares since then at an average cost of $32,16 per share. PulteGroup also pays a dividend, and this year they increased it by 25%, which means its dividend has grown at a compounded annual growth rate of 13,67% over the past decade.



Now it is time to calculate the share price of PulteGroup. I perform three different calculations that I learned at a Phil Town seminar. The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 11,72, which is from the year 2023. I have selected a projected future EPS growth rate of 10%. According to Finbox, EPS has grown 28,6% a year over the past five years, but I prefer to be a bit more conservative. Additionally, I have selected a projected future P/E ratio of 20, which is double the growth rate. This decision is based on PulteGroup's historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $150,28. 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 $75,14 (or lower, obviously) if we use the Margin of Safety price.


The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 2.197, and capital expenditures were 92. I attempted to analyze their annual report in order to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 64 in our calculations. The tax provision was 847. We have 212,558 outstanding shares. Hence, the calculation will be as follows: (2.197 – 64+ 847) / 212,558 x 10 = $140,20 in Ten Cap price.


The final calculation is referred to as the Payback Time price. It is a calculation based on the free cash flow per share. With PulteGroup's free cash flow per share at $9,76 and a growth rate of 10%, if you want to recoup your investment in 8 years, the Payback Time price is $122,78.


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 observed between 2006 and 2011. The homebuilding industry is highly fragmented, making it a perpetual risk for PulteGroup, particularly due to the challenge of establishing a strong moat in this sector. However, I appreciate PulteGroup's efforts to enhance its competitive edge, such as the introduction of their rate buydown program. Furthermore, PulteGroup has been operating for more than 70 years. Therefore, I am confident that they will be able to effectively deal with this competition. The homebuilding industry is cyclical, and it is something one needs to endure when investing in PulteGroup. However, over the past decade, PulteGroup has articulated a strategy aimed at achieving high returns and delivering strong financial results throughout the entire housing cycle. Thus, their business is certainly not immune to changes in the economic cycle, but management believes that they can continue to position the business to deliver a higher and more consistent level of performance. The housing deficit and various growth factors, such as entering new markets, acquiring more land through land options, and reducing the construction cycle, should benefit PulteGroup in the short and long term. Finally, PulteGroup is very shareholder-friendly as they continue to buy back shares and increase their dividend. I will buy shares in PulteGroup if they reach $75, which is below the Margin of Safety price, and will provide me with a 50% discount on intrinsic value in all my calculations.


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I hope that you enjoyed my analysis. Unfortunately, I cannot do a post of all the companies I analyze. I am available to copy but if you do your own trades, you can follow me on Twitter instead, as I tweet when I buy or sell anything.


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3 Comments


Martyn Legg
Martyn Legg
Feb 26, 2021

Excellent, thank you for all this effort!

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Glenn
Feb 21, 2021

@Arinze Onyiah Thank you for your comment. It is a good point, I haven't looked into the knock-on effect it could have on energy companies but it is certainly something I will look into. I will let you know if I find anything intersting.

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Arinze Onyiah
Arinze Onyiah
Feb 21, 2021

"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."


Regarding this section in your post, It would be useful to consider the knock-on effects. If houses are more efficient, energy companies might also benefit from the excess allowing them to generate further income from the distribution. These…


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