Company Overview: PulteGroup, Inc. (NYSE: PHM) is one of the largest homebuilding companies in the US, having operations in more than 40 markets in 23 states. Its operating segments are 1) Homebuilding, which is engaged in the acquisition, development, and construction of houses on land primarily used for residential purposes, and 2) Financial Services (offered through Pulte Mortgage LLC and other subsidiaries), which comprises of mortgage banking, title, and insurance brokerage operations. PHM markets a wide range of home designs, including single-family detached, townhouses, condominiums and duplexes under Centex, Pulte Homes, Del Webb, DiVosta Homes, John Wieland Homes and Neighborhoods brands.

PHM Details

Key Takeaways from Q2FY21 (ended June 30, 2021)

• Double-Digit Growth in Revenue: In Q2FY21, the company's total revenue amounted to USD 3.36 billion, representing a 29.52% increase year-over-year from USD 2.59 billion.
• Improvement in Gross Margin: PHM reported a gross profit of USD 912.38 million for the current quarter, representing a higher gross margin of 27.16% vs. 25.41% for Q2FY20, attributable to a higher Average Selling Price (ASP).
• Surge in Net Income: The net income for Q2FY21 was USD 503.40 million vs. USD 348.62 million in Q2FY20, representing diluted earnings per share (EPS) of USD 1.90.

Revenues & Gross Profit Key Highlights; Analysis by Kalkine Group

Recent Developments:

• On September 08, 2021, the company declared a dividend of USD 0.14 per common share, payable on October 05, 2021, to shareholders of record on September 20, 2021.
• On August 17, 2021, PHM launched MINE x Pulte, an online interior design solution through which the homebuyers can purchase similar furniture and décor items that are featured in PHM's collection of model homes across the country.
• On July 26, 2021, PHM collaborated with Invitation Homes, a single-family home leasing company, to design and construct ~7,500 new homes over the next five years for the latter's single-family rental leasing portfolio.

Other Key Findings in Q2FY21

• In Q2FY21, PHM bought back 3.48 million shares for an aggregate consideration of USD 200 million and had USD 1.0 billion remaining under its share repurchase authorization at quarter-end (including an additional USD 1.0 billion authorized in April 2021).
• The company's net new orders increased 27.60% year-on-year to 8,322 units from 6,522 units reported in Q2FY20, whereas the total home closings were 7,232 units, representing an improvement of 21.81% year-on-year from 5,937 units in the prior comparable period.

Closings Highlights; Analysis by Kalkine Group 

Balance Sheet & Liquidity Position

• Decline in Cash Balance: The company exited Q2FY21 with a cash balance of USD 1.66 billion, 35.59% less than USD 2.58 million at the end of FY20.
• Cashflow from Operations: Operating cash inflow in H1FY21 reduced to USD 432.07 million from USD 807.87 million in Q2FY20 due to increased inventories and other current assets.
• Reducing Debt: PHM's total outstanding debt amounted to USD 2.40 billion at Q2FY21 end, 24.18% lower than USD 3.16 billion at the end of December 31, 2020.

Key Metrics: In Q2FY21, PHM's operating and net margins were 19.0% and 15.0%, slightly higher than 17.6% and 13.4%, respectively, reported in Q2FY20. ROE stood at 7.4%, 130 bps higher than the Q2FY20 return. Debt/Equity was 0.34x as of June 30, 2021, vs. the industry median of 0.44x.

Profitability and Leverage Profile; Analysis by Kalkine Group  

Top 10 Shareholders: The top 10 shareholders together form around 38.19% of the total shareholding, while the top 4 constitute the maximum holding. The Vanguard Group, Inc., and BlackRock Institutional Trust Co., N.A. hold the maximum stake in the company at 11.03% and 6.99%, respectively, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group 

Risk Analysis

• Operates in a Cyclical Industry: The homebuilding sector is cyclical in nature, and changes in economic conditions and other factors, such as employment, consumer confidence, consumer income, availability of finance, and interest rate levels, directly influence the residential homebuilding market. Therefore, any downturn in the economy and other factors in the PHM's key market areas could impair the company's financial performance.
• Land Availability Risk: PHM's ability to acquire land for developing residential communities is crucial for its operations. Accordingly, any change in the general availability of land, land sellers' willingness to sell their land at reasonable rates, financing, zoning, or other restrictions could impact its ability to buy land and, therefore, its financial performance.
• Stiff Competition: PHM operates in the highly competitive housing industry and faces direct competition from several national, regional, and local home builders based on multiple factors, including location, price, quality, and others, which could cause a reduction in its sales volume or put pricing pressure.
• Interest Rate Risk: The majority of PHM's customers finance their home purchases through mortgage loans, most of which are provided by Pulte Mortgage. Therefore, higher interest rates or a reduction in the availability of mortgage finance could harm the new home market in terms of higher monthly costs and increased qualification for granting the loan. All these factors could negatively impact the company's sales and profit margins.

Outlook

• Looking forward, PHM expects year-on-year growth of 8% in home closings to 7,000 units in Q3FY21. For FY21, the closings are estimated to be in the range of 29,250 – 29,750 units, thus realizing a year-on-year growth of 19% – 21%.
• This is despite the impact of the increase in industry-wide supply chain issues such as shortages for building products aided by higher production volumes across the industry in H2FY21.
• It also forecasts to earn a gross margin of 26.4% – 26.6% and incur SG&A expenses to the tune of 9.9% of home sale revenue in Q3FY21.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company's NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: Over the last three months, PHM's share price has corrected 10.54%. The stock is currently close to the lower end of its 52-week range of USD 39.92 to USD 63.91. We have valued the stock using the EV/Sales multiple-based illustrative relative valuation method and arrived at a target price with an upside of low twenties (in percentage terms). We believe that the company can trade at a slight discount compared to its peer's average, considering the fluctuation in interest rates, competition from large peers, land availability, and the economic conditions of its operating regions. We have taken peers like Tri Pointe Homes, Inc. (NYSE: TPH) and Dream Finders Homes, Inc. (NASDAQ: DFH). Considering the decent top and bottom-line performance, recent collaboration, decent outlook, and current valuation, we give a "Buy" recommendation on the stock at the closing price of USD 47.88, up 1.66% as of September 22, 2021.

PHM Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors' appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and the uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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