Why I'm Doubling Down My Bet on This Top Home Building Stock

I’m adding more shares of PulteGroup to my portfolio.

Matthew DiLallo
Matthew DiLallo
Apr 28, 2014 at 1:00PM

Toward the end of last year, my wife and I made the biggest financial decision of our lives. We decided to build a house. It wasn't a move either of us took lightly, but the research was compelling that building was better for us than buying an existing home.

In diving into the different builders I discovered that the company we chose, PulteGroup (NYSE:PHM), was a pretty compelling investment. Having worked with PulteGroup for the past few months on our home buying process, I'm even more convinced that the company's platform and intangibles truly make it a top home building stock for a long-term investment. That's why I'm planning to double down on my investment in PulteGroup.

Solid foundation
What I found by digging into PulteGroup was a homebuilder that is built on a very solid financial foundation. The company has substantially deleveraged its balance sheet since the financial crisis. The balance sheet is now a source of strength and flexibility. Last year alone the company retired $461 million in debt, while its year-end case balance rose $234 million to $1.7 billion. That dropped PulteGroup's debt-to-capital ratio down to 31% last year from 53% in 2012, while its net debt to cap plunged to just 8% at the end of last year from 32% in 2012 .

The strength and flexibility of the balance sheet enabled PulteGroup to return some cash to investors even as it continues to invest in future growth. Last year, the company bought back 7.2 million shares while paying $38 million in dividends. This still left PulteGroup with the financial capacity to authorize $2 billion in land investments for 2014, up from $1.3 billion last year.

All the amenities
What really sets PulteGroup apart is its multibrand strategy, which includes Centex for first-time homebuyers, Pulte Homes for move-up buyers, and Del Webb for the active-adult buyer. Combining these distinct brands with the company's in-house mortgage and insurance segments puts PulteGroup in a league of its own. This enables the company to not only compete in all segments of the market, but also to capture more revenue from the homebuying process.

While competitors such as Hovnanian Enterprises (NYSE:HOV) and Beazer Homes (NYSE:BZH) compete for many of the same customer segments, they perhaps do not differentiate their offerings as well. For example, the Beazer community that my wife and I considered was targeting the move-up buyer by price point, but the quality of the homes and options available were more geared for the first-time homebuyer segment and simply were not on the same level as the Pulte community we chose. Meanwhile, Hovnanian might build homes for the active-adult buyer through its Four Seasons offering, but it's not yet on par with the segment-leading Del Webb brand. 

Furthermore, PulteGroup has become a one-stop shop for home buyers. My wife and I were able to get a better mortgage offer, as well as a better rate on home owners' insurance, by using Pulte's in-house options. I could have saved myself a lot of time by not shopping around for additional offers, as none even came close to matching Pulte's offers. Beazer Homes points out that it gives buyers mortgage options by selecting four local banks that its customers can utilize. While some might prefer that feature, I found it much easier to work with Pulte's in-house mortgage group than most other mortgage providers that I used to compare offers. These in-house options enable Pulte to keep more of the revenue that its buyers would have spent elsewhere, while saving them the time of seeking other options.

Excellent view of the future
PulteGroup is well positioned to grow along with the housing market and to take share as it does. This year, the company is adding $700 million to its investment in land so that it is positioned to capture the slowly improving housing market. However, it's not going on a land grab, either, as the company did learn from previous mistakes during the last go-around. This time it's using more options to acquire land in order to minimize its risks.

Finally, one of the most important drivers of PulteGroup going forward will be its Del Webb brand, which currently represents about 30% of its total closings. The fact that the baby boomers are getting older and looking to enjoy life when retired bodes well for the continued growth of Del Webb. In 2013, Del Webb-branded homes sold for an average of $314,000, which was up 11% from the previous year. The average selling price is likely to continue trending upward, as the typical Del Webb buyer is part of the large, affluent buyer segment that desires a home in a resort-like community and can pay cash.

Related Articles

Investor takeaway
Having experienced all PulteGroup has to offer as a home buyer, I'm truly impressed with the company and confident that it's built to last. The company's balance sheet provides a rock-solid foundation, while its multibrand, full-service offering sets it apart from the competition. That's why I'll soon be doubling down on my bet on this top-tier home building stock.