4 Reasons To Add Pulte (PHM) Stock To Your Portfolio Now

Despite a weak start to the year due to an array of reasons including equity market volatility and global concerns, the construction sector seems to have recovered on the back of strong housing fundamentals. The spring/summer selling season in 2016 was better than the last year. The springtime weather boosts construction activity and traffic trends.

Additionally, positives like an improving economy, modest wage growth, low unemployment levels, low interest rates, positive consumer confidence and a tight supply situation raise optimism about the sector’s performance for the second half.

Given the positive momentum surrounding the housing sector, leading homebuilder PulteGroup, Inc. (NYSE:PHM) might be an interesting choice for investors at the moment.

With a market cap of $7.24 billion, the Atlanta-based homebuilder enjoys a broad geographic and product diversity with a strong growth potential. Pulte currently has a Zacks Rank #1 (Strong Buy).

Why Pulte Is a Good Choice

Strong Second Quarter Results; Positive Outlook for Second Half: Building upon the strong first quarter performance, Pulte beat estimates for both earnings and sales in the second quarter of 2016. Adjusted earnings of 37 cents per share surged 61% year over year on the back of higher home sales and lower share count. Home sales rose 41% driven by higher average selling prices (ASPs) and home closings.

We are optimistic about Pulte’s second half performance assisted by the steadily improving housing market, strong backlog position, focus on higher-return business and the recent Wieland acquisition.

New Value Creation Strategy: Pulte announced the next phase of its value-creation strategy at the second-quarter conference call.

Pulte’s strategic land investments in the past few years resulted in improved volumes, revenues and profitability in 2016 – a trend that is likely to continue over the next few years.

Thus, in anticipation of growth, the company plans to slow down land investments in 2017 and beyond as it has a robust pipeline to support operations for the next few years.

Pulte will use the extra cash flow resulting from the lower land spend to drive greater overhead leverage and increase share buyback activity which will result in earnings growth.

The company intends to reduce its SG&A ratio from the expected 10% of home sale revenues in 2016 to a targeted rate of 9% or less in 2017.

The board of directors increased the share repurchase plan by $1 billion, raising the total authorization to $1.5 billion. The company expects to repurchase shares worth $1.5 billion over the next six quarters.

All these initiatives bode well for accelerated earnings growth over the next several quarters.

Rising Estimates and Share Price: Pulte’s shares have had a good run this year, gaining around 23% year-to-date. Over the past 30 days, analysts have become bullish on the company, with 3 out of 5 estimates moving upward for 2016 earnings. The 2016 earnings estimate went up 1.2%, while that for 2017 moved up an impressive 10.6% over the same time frame.

Restructuring and Strategic Initiatives: Apart from prudent capital allocation, Pulte is taking actions to bolster its operating and financial performance. These initiatives include enhancing overhead leverage, increasing inventory turns and implementing new pricing strategies that have led to higher profits. As part of its cost reduction program, Pulte significantly streamlined the workforce and curtailed overhead costs as well as inventory.

Moreover, aggressive debt repayment aided by improved financial position lowered the company’s interest costs.

In addition, Pulte’s strategic pricing programs are pushing ASPs higher for the past few quarters. These strategic initiatives allow buyers to select the lots and options that they value most, resulting in higher levels of house options and lot premiums.

Conclusion

Overall housing demand remains positive; nevertheless, Pulte has warned that the industry challenges – labor constraints and rising labor costs – are unlikely to improve in the near term.

Nonetheless, the company has been countering these headwinds successfully and is currently a good investment choice.

Stocks to Consider

Some other homebuilder stocks worth considering are MDC Holdings Inc. (NYSE:MDC) , TRI Pointe Group, Inc. (NYSE:TPH) and KB Home (NYSE:KBH) . While MDC Holdings and TRI Pointe Group sports a Zacks Rank #1 (Strong Buy), KB Home carries a Zacks Rank #2 (Buy).