PulteGroup Downgraded By Buckingham After 70% Gain

PulteGroup, Inc. PHM shares have gained over 70 percent amid strong housing market fundamentals and positive broader market sentiment.

The rally has pushed some wary sell-side analysts to the sidelines, given the view that the risk-reward proposition is now more balanced.

The Analyst

Buckingham Research analyst Mark Weintraub downgraded shares of PulteGroup from Buy to Neutral and upped his price target from $31 to $33.

The Thesis

PulteGroup's 70 percent gain year-to-date stans in contrast to a 45 percent increase across a broad group of 20 publicly traded builders and the 15 percent rally seen in the S&P 500 Index, Weintraub said. (See Weintraub's track record here.) 

The housing cycle likely has more upside, as most indicators point to continued directional improvement, the analyst said. 

Several drivers behind PulteGroup's earnings per share growth have played out, Weintraub said. The company is on course to have completed the repurchase of about 20 percent of its shares by the end of 2017, the analyst said. The repurchases are expected to slow down into next year due to a higher debt-to-capital ratio, he said. 

PulteGroup's gross margins, now padded up by declining amortized interest expense through 2016, may not be supported anymore, according to Buckingham.

"We see strong revenue growth in 2018, but the trajectory of land spend suggests possible slowing in 2019,."

The Price Action

PulteGroup shares have been broadly higher from the start of 2017, with the slope of the rally steepening since early October.

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