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PulteGroup’s Valuation Is Not Expected to Improve Dramatically

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Analysts’ recommendations

On October 22, PulteGroup’s stock closed at $18.16. With an average consensus price target of $21.79, the stock is still trading at a discount of 16.7% to analysts’ expectations.

Among the 15 analysts following the stock, five have assigned a “buy” rating. It received three sell ratings and seven “hold” ratings. Presently, PulteGroup has a consensus “hold” rating. However, it must be noted that the analyst consensus rating on PulteGroup’s stock was before the release of 3Q15 earnings. It needs to be seen whether analysts change their ratings on the stock in view of the latest data.

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A number of brokerage houses recently came out with a research report on PulteGroup. In a research report on October 13, Barclays rated PulteGroup (PHM) stock as “underweight,” and lowered its price target from $19 to $17. Also. Morgan Stanley cut PulteGroup’s rating from an “equal-weight” to an “underweight,” and reduced its target price from $22 to $18.

Lower valuations

On an EV/EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) basis, most major homebuilders trade at around the same multiple, except PulteGroup. Currently, PulteGroup shares are trading at an EV/EBITDA multiple of 7.8x, while the average EV/EBITDA multiple for homebuilders is 10.4x. PulteGroup trades at a lower EV/EBITDA multiple, with lower home closings, a decline in earnings, and the rising cost structure taking their toll on the company’s business. Currently, PulteGroup has one of the cheapest stocks among its major homebuilder peer group. PulteGroup’s valuation is not expected to improve dramatically from here unless the company shows some improvement in its finances.

On the other hand, Lennar Corporation (LEN), D.R. Horton (DHI), and Toll Brothers (TOL) are trading at higher EV/EBITDA multiples of 9.7x, 9.8x, and 10.8x, respectively. The iShares US Home Construction ETF (ITB) invests 7.7% of its portfolio in PulteGroup.

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