PulteGroup Price Isn't Right; BoA Downgrades

Bank of America Merrill Lynch on Wednesday issued a note on PulteGroup Inc. PHM after a recent rally in many homebuilder stocks has made current valuations unattractive. Bank of America downgraded PulteGroup from Neutral to Underperform and maintained their $18 price target.

Analysts John Lovallo and Peter Galbo wrote, "We continue to expect new home sales to slowly recover through our 2018 forecast period. However, the market is unlikely to differentiate between slowing growth in certain sectors of the domestic economy and continued measured growth in homebuilding volume, thus preemptively discounting the cycle peak for homebuilder stocks...We expect PHM's results to continue improving, but believe better investment opportunities exist within the group."

Although they downgraded the stock due to a currently unattractive valuation, analysts gave two key reasons why they see long-term strength in PulteGroup.

1. Product Mix

Analysts noted that PulteGroup has several initiatives to drive margin growth, including the use of commonly managed plans and a greater mix of branded homes which may support pricing and gross margins.

2. Financial Results

Bank of America highlighted that PulteGroup's 4Q15 financial results were ahead of forecasts. This was led by revenue growth of 12 percent year-over-year, which has the potential to continue into future periods.