Pulte Keeps Building Value
By
Richard McCaffery (TMF Gibson)
January 21, 2000
If you think stock prices don't make sense for Internet companies, check out the valuations for homebuilders. It's a stock market funhouse, and homebuilders are casting a reverse image.
Consider that Pulte (NYSE: PHM), the nation's largest homebuilder, reported dynamite fourth quarter and full year earnings this morning and its stock moved up around one percent to about $18 3/8.
The company, which has domestic operations in 26 states as well as Mexico and Puerto Rico, is down almost 30% since last January as higher interest rates forced a year-long sell off. Homebuilders Centex (NYSE: CTX), Toll Brothers (NYSE: TOL), and Kaufman & Broad (NYSE: KBH) got the same treatment as the sector plunged about 37% in 1999, according to the Standard & Poor's SuperComposite 1,500 index.
It's strange. Interest rate fears didn't prevent buyers from snapping up new homes, as Pulte and its affiliates sold a record number 26,622 homes in 1999, but rising interest rates spooked investors away from homebuilding stocks. Are people overreacting? Is the outlook for the homebuilder's market that glum in the coming years?
According to a recent Merrill Lynch report, fears the super-strong housing market is running out of steam, as well as disinterest in small-cap and mid-cap stocks, contributed to low valuations. This is well worth considering since these are short-term issues. Simply put, exalted values for high tech stocks warp the valuations of stocks in less glamorous sectors, which means good values abound.
Pulte, for example, had a great year. Net income from continuing operations jumped 76% to $178.3 million, or $4.07 per share, compared to $101.1 million, or $2.30 per share last year. Sales jumped 30% to $3.73 billion, and, in the fourth quarter, average sales prices of homes hopped 8% to $192,000.
Digging deeper, Pulte's return on average equity, a measure of how effectively the company uses shareholders' money, more than doubled to 18% in 1999 without the company adding any serious debt, and Pulte's pretax operating margins for the year increased to 8%, from 6% last year.
Yet talk about out of favor. Pulte's trailing price/earnings ratio is 4.5, compared to the S&P 500 average of 32.4. No wonder management just announced a $100 million share repurchase program.
Look closer. Since Pulte has little in the way of intangible assets, book value is one way to get a reasonable feel for the company's rock-bottom value. Now, I can't say for sure its housing and land inventories would liquidate at $1.8 billion, the amount they're carried at on the balance sheet, but assuming it's fairly close, Pulte shouldn't trade for less than $24.95 per share. It's hard to understand, even in a cyclical sector so out of favor, why a profitable, growing, well-run company with international prospects would sell at a more than a 20% discount to its break up value.
It's worth a closer look.
