The company: PulteGroup (PHM) is large cap public company that operates in the development and construction business. The company was founded in 1956 and became public in 1972. Since then, PHM has acquired a handful of construction companies. The company primarily operates in the residential portion of the industry; they buy land, develop it, and build on it. The types of construction vary, but primarily include homes, townhouses, duplexes, and condominiums. They also assist customers with financing. From what I can see, they build high quality homes that their customers are happy with.
Advantages: With interest rates as low as they are, one could say the Federal Reserve is PHM’s greatest advantage. Ever since the FR lowered rates back in March of last year, this has allowed buyers to borrow money at incredibly cheap rates. Low borrowing rates are a catalyst for home buying. I don’t see these rates changing, especially with the economy still recovering from COVID-19. There’s still a lot of development to do in the US; as long as there are reasonable rates, people will be buying houses. From what I can tell, they have a good reputation as home builders and a strong customer base, both of which will help bring in new customers. I expect the housing market will stay strong with minimum fluctuation for the next few years.
Disadvantages: The success of this company is dictated by interest rates. Although I think the rates will be favorable for this company in the near future, I don’t like the success of a company being so depended on external factors or political factors. With the baby boomer generation getting older and the excessive amount of houses being built, I’m concerned that there will be too many houses on the market at some point. Combine that with a rise in interest rates and it could cause disturbances in the market. With the jump in excitement during the past year, I’m not confident that the trend can continue. A slow-down in the near future is reasonable to suspect.
Valuation and current state: I consider this a value stock with an enterprise multiple of 8. When observing valuation measures such as P/S, P/FCF, PEG, and P/B, all are less than the industry average and the company’s 5 year average. If this stock reverts to its mean, there will be good returns. When I look at ROE, profit margins, growth prospects, share buybacks, and their debt situation, they seem to be in great shape. When running a conservative DCF, I get double digit returns. This stock seems to check all my quantitative boxes, which doesn’t happen often.
Advantages: With interest rates as low as they are, one could say the Federal Reserve is PHM’s greatest advantage. Ever since the FR lowered rates back in March of last year, this has allowed buyers to borrow money at incredibly cheap rates. Low borrowing rates are a catalyst for home buying. I don’t see these rates changing, especially with the economy still recovering from COVID-19. There’s still a lot of development to do in the US; as long as there are reasonable rates, people will be buying houses. From what I can tell, they have a good reputation as home builders and a strong customer base, both of which will help bring in new customers. I expect the housing market will stay strong with minimum fluctuation for the next few years.
Disadvantages: The success of this company is dictated by interest rates. Although I think the rates will be favorable for this company in the near future, I don’t like the success of a company being so depended on external factors or political factors. With the baby boomer generation getting older and the excessive amount of houses being built, I’m concerned that there will be too many houses on the market at some point. Combine that with a rise in interest rates and it could cause disturbances in the market. With the jump in excitement during the past year, I’m not confident that the trend can continue. A slow-down in the near future is reasonable to suspect.
Valuation and current state: I consider this a value stock with an enterprise multiple of 8. When observing valuation measures such as P/S, P/FCF, PEG, and P/B, all are less than the industry average and the company’s 5 year average. If this stock reverts to its mean, there will be good returns. When I look at ROE, profit margins, growth prospects, share buybacks, and their debt situation, they seem to be in great shape. When running a conservative DCF, I get double digit returns. This stock seems to check all my quantitative boxes, which doesn’t happen often.
Final thoughts: This stock pick is quantitatively attractive. I can see this company being successful and I don’t see any significant changes to the industry in the foreseeable future. Yes, I’m sure some fluctuation in the housing market will occur, but nothing too crazy. I’m personally not too confident in the housing and construction industry due to a lack of knowledge, but I like this pick - especially if a correction were to occur.
Links:
https://simplywall.st/stocks/us/consumer-durables/nyse-phm/pultegroup/news/heres-why-i-think-pultegroup-nysephm-might-deserve-your-atte
https://simplywall.st/stocks/us/consumer-durables/nyse-phm/pultegroup/news/is-it-too-late-to-consider-buying-pultegroup-inc-nysephm
https://finance.yahoo.com/m/eba527c9-38f7-30dc-a131-f6b71eaad98f/2020-existing-home-sales.html
https://finance.yahoo.com/quote/PHM/key-statistics?p=PHM
https://www.morningstar.com/stocks/xnys/phm/valuation
https://simplywall.st/stocks/us/consumer-durables/nyse-phm/pultegroup/news/heres-why-i-think-pultegroup-nysephm-might-deserve-your-atte
https://simplywall.st/stocks/us/consumer-durables/nyse-phm/pultegroup/news/is-it-too-late-to-consider-buying-pultegroup-inc-nysephm
https://finance.yahoo.com/m/eba527c9-38f7-30dc-a131-f6b71eaad98f/2020-existing-home-sales.html
https://finance.yahoo.com/quote/PHM/key-statistics?p=PHM
https://www.morningstar.com/stocks/xnys/phm/valuation
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