Key Points
- PulteGroup struggled in Q4, but normalization and growth are in the forecast.
- Despite the top-line decline, the company generated ample cash flow and free cash flow.
- Capital returns include share repurchases and dividends; share repurchases account for 6% of the float in 2023.
- 5 stocks we like better than PulteGroup
PulteGroup Inc.'s NYSE: PHM share price surged on its Q4 results and guidance but quickly pulled back as profit takers took advantage of the move. The resulting candle suggests a top is in place, but the downside potential is limited. The takeaway from the results and outlook is that normalization within the homebuilding market is at hand, growth is back in the forecast, and a tailwind is developing in lower interest rates. The average 30-year mortgage is down more than 60 basis points from its high and already attracting buyers to the market, with rates expected to fall further by year-end.
This means that PulteGroup will continue to build value for investors. The company's business is down double-digits in Q4 but still sufficient to produce robust cash flow and free cash flow used to generate shareholder value. Value is given via dividends and, more significantly, via share repurchases and balance sheet strength. PulteGroup lowered its debt and improved its leverage ratio in 2023 while paying its dividend and making robust share repurchases. The results of those actions helped to increase shareholder equity by 16%.
The dividend isn't robust with a 0.75% yield, but it is incredibly safe at 5% of earnings and repurchases more than offset the weakness. Repurchases in 2023 topped 6%, bringing the total repurchased since 2013 to nearly 50%, with aggressive repurchases expected in 2024. The company issued a new repurchase authorization alongside the Q4 earnings release worth $1.5 billion or 6.5% of the post-release market cap. The remaining allotment is worth more than 7% of the market and will likely be increased at the end of the fiscal year, if not before.
PulteGroup contracts in Q4; growth will return in Q1
PulteGroup struggled in Q4 due to issues with rates and demand earlier in the year. The company reported $4.2 billion in net revenue for a decline of 16% YOY, driven by a 14% decline in volume compounded by a low-single-digit price decline. However, the critical details are that the margin was relatively stable as pricing declines eased, and the outlook for 2024 is solid.
The company reported net new orders accelerated to +57% YOY and are expected to remain solid as the year progresses. The backlog is down sequentially but flat compared to last year and sufficient to sustain operational growth for at least two quarters without an increase in orders. Assuming that new order momentum continues, Pulte will likely outperform the consensus forecast for the year.
The margin news is a little mixed: the gross margin contracted and SG&A increased but less than expected. This left the GAAP earnings down 960 basis points compared to the 16% top-line decline and earnings of $3.28 and $0.06 ahead of consensus. Pulte didn't give guidance but left the market with positive commentary. Executives believe demand for new houses will improve due to steady, healthy labor markets, lower interest rates, and tight supply.
Valuation may cap PulteGroup share price in Q1
PulteGroup is a relatively cheap stock to buy trident at 9.2X its earnings, but gains may be capped in Q1. The entire home building industry trades at a similar valuation, and analysts aren't expecting much regarding earnings growth this year. The consensus is for modest top-line growth and a slight margin contraction to leave EPS flat YOY despite the expected share repurchases.
Analysts' sentiment may also cap gains in the near term. The analysts rate the stock at Moderate Buy and have raised the consensus price target by 100% over the last 12 months, but it lags behind the stock price action. If the analysts don't continue the trend of upward revisions in Q1, there is a high risk the market will correct back to the consensus level or lower before it sets a new high.
The technical outlook: PulteGroup sets new all-time high
PulteGroup's share price hit a new all-time high following the Q4 release. However, the move shows resistance to higher prices and a potential top for the market. The worst-case scenario is the market corrects to $90 or lower, which is not expected now. The best case scenario is that the market consolidates at current levels and then moves higher, possibly with analysts' upgrades and revisions to help it. The most likely scenario between those two includes a mild correction to solid support levels near $100, a consolidation and higher highs later this year.
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