PulteGroup can reach a new high in 2024

PulteGroup Inc NYSE: PHM The stock price rose based on fourth-quarter results and forecasts, but quickly retreated as profit takers took advantage of the move. The resulting candle suggests that a top is in place, but the downside potential is limited. The conclusion drawn from the results and outlook is that normalization of the residential construction market is within reach, growth is back in the forecast and a tailwind with lower interest rates is developing. The average 30-year mortgage is down more than 60 basis points from its peak and is already attracting buyers to the market, with rates expected to fall further later this year.

This means PulteGroup will continue to create value for investors. The company’s business fell by double digits in the fourth quarter, but is still sufficient to produce robust cash flow and free cash flow used to generate shareholder value. Value is delivered through dividends and, more significantly, through share repurchases and balance sheet strength. PulteGroup reduced its debt and improved its leverage ratio in 2023, while paying dividends and making robust share repurchases. The results of these actions contributed to increasing the share capital by 16%.

The dividend isn’t robust at a 0.75% yield, but it’s incredibly safe at 5% of earnings, and buybacks have more than made up for the weakness. Repurchases in 2023 exceeded 6%, bringing total repurchases since 2013 to nearly 50%, with aggressive repurchases expected in 2024. The company issued a new repurchase authorization in conjunction with its fourth-quarter earnings release worth of $1.5 billion, or 6.5% of the post-release market capitalization. . The remaining share is worth more than 7% of the market and will likely be raised at the end of the fiscal year, if not sooner.

PulteGroup Contracts in Q4; growth will return in the first quarter

PulteGroup struggled in the fourth quarter due to rate and demand issues earlier in the year. The company reported net sales of $4.2 billion on a 16% year-over-year decline, driven by a 14% volume decline compounded by a single-digit price decline. However, the critical details are that the margin has remained relatively stable as the price decline has moderated and the outlook for 2024 is solid.

The company reported that net new orders increased +57% year over year and is expected to remain solid throughout the year. Order backlog is declining sequentially but stable compared to last year and sufficient to support operational growth for at least two quarters without an increase in orders. Assuming new order momentum continues, Pulte will likely beat consensus forecasts for the year.

Margin news is a bit mixed: gross margin contracted and SG&A increased, but less than expected. This left GAAP earnings down 960 basis points on revenue declines of 16% and earnings $3.28 and $0.06 ahead of consensus. Pulte gave no guidance but left the market with positive comments. Executives believe demand for new homes will improve thanks to stable, healthy job markets, lower interest rates and limited supply.

The valuation could cap PulteGroup’s stock price in the first quarter

PulteGroup is a relatively cheap stock to buy trident at 9.2 times its earnings, but earnings could be limited in the first quarter. The entire residential construction sector trades at a similar valuation, and analysts don’t expect much in the way of earnings growth this year. The consensus is for modest revenue growth and a slight contraction in margins to leave EPS flat year-over-year despite planned share repurchases.

Analyst sentiment it could also limit gains in the short term. Analysts rate the stock at Moderate Buy and have raised the consensus price target by 100% over the past 12 months, but it lags the share price action. If analysts do not continue the trend of upward revisions in the first quarter, there is a high risk that the market will return to the consensus level or fall before reaching a new high.

Technical Outlook: PulteGroup sets new all-time high

PulteGroup’s stock price hit a new all-time high following its fourth-quarter release. However, the move shows resistance to rising prices and a potential top for the market. The worst case scenario is that the market corrects to $90 or lower, which is not expected at the moment. The best-case scenario is that the market consolidates at current levels and then moves higher, possibly with analyst updates and revisions to help it along. The most likely scenario between these two includes a mild correction towards solid support levels around $100, a consolidation and higher highs later this year.

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