Playing PulteGroup Stock as Fed's Rate Cut Sparks Housing Boost

PulteGroup (PHM) has been one of the most searched-for stocks on Zacks.com lately. So, you might want to look at some of the facts that could shape the stock's performance in the near term.

Over the past month, shares of this homebuilder have returned -5.4%, compared to the Zacks S&P 500 composite's +4.9% change. During this period, the Zacks Building Products - Home Builders industry, which PulteGroup falls in, has lost 4.6%. The key question now is: What could be the stock's future direction?

While media releases or rumors about a substantial change in a company's business prospects usually make its stock 'trending' and lead to an immediate price change, there are always some fundamental facts that eventually dominate the buy-and-hold decision-making.

Revisions to Earnings Estimates

Here at Zacks, we prioritize appraising the change in the projection of a company's future earnings over anything else. That's because we believe the present value of its future stream of earnings is what determines the fair value for its stock.

Our analysis is essentially based on how sell-side analysts covering the stock are revising their earnings estimates to take the latest business trends into account. When earnings estimates for a company go up, the fair value for its stock goes up as well. And when a stock's fair value is higher than its current market price, investors tend to buy the stock, resulting in its price moving upward. Because of this, empirical studies indicate a strong correlation between trends in earnings estimate revisions and short-term stock price movements.

PulteGroup is expected to post earnings of $3.23 per share for the current quarter, representing a year-over-year change of -1.5%. Over the last 30 days, the Zacks Consensus Estimate has changed -4.7%.

For the current fiscal year, the consensus earnings estimate of $13.40 points to a change of +14.3% from the prior year. Over the last 30 days, this estimate has changed +0.1%.

For the next fiscal year, the consensus earnings estimate of $13.41 indicates a change of +0.1% from what PulteGroup is expected to report a year ago. Over the past month, the estimate has changed -1.3%.

Having a strong externally audited track record, our proprietary stock rating tool, the Zacks Rank, offers a more conclusive picture of a stock's price direction in the near term, since it effectively harnesses the power of earnings estimate revisions. Due to the size of the recent change in the consensus estimate, along with three other factors related to earnings estimates, PulteGroup is rated Zacks Rank #3 (Hold).

The chart below shows the evolution of the company's forward 12-month consensus EPS estimate:

12 Month EPS

Revenue Growth Forecast

Even though a company's earnings growth is arguably the best indicator of its financial health, nothing much happens if it cannot raise its revenues. It's almost impossible for a company to grow its earnings without growing its revenue for long periods. Therefore, knowing a company's potential revenue growth is crucial.

In the case of PulteGroup, the consensus sales estimate of $4.64 billion for the current quarter points to a year-over-year change of +8.2%. The $17.63 billion and $18.65 billion estimates for the current and next fiscal years indicate changes of +9.8% and +5.8%, respectively.

Last Reported Results and Surprise History

PulteGroup reported revenues of $4.48 billion in the last reported quarter, representing a year-over-year change of +11.8%. EPS of $3.35 for the same period compares with $2.90 a year ago.

Compared to the Zacks Consensus Estimate of $4.26 billion, the reported revenues represent a surprise of +5.13%. The EPS surprise was +8.06%.

The company beat consensus EPS estimates in each of the trailing four quarters. The company topped consensus revenue estimates three times over this period.

Valuation

No investment decision can be efficient without considering a stock's valuation. Whether a stock's current price rightly reflects the intrinsic value of the underlying business and the company's growth prospects is an essential determinant of its future price performance.

Comparing the current value of a company's valuation multiples, such as its price-to-earnings (P/E), price-to-sales (P/S), and price-to-cash flow (P/CF), to its own historical values helps ascertain whether its stock is fairly valued, overvalued, or undervalued, whereas comparing the company relative to its peers on these parameters gives a good sense of how reasonable its stock price is.

As part of the Zacks Style Scores system, the Zacks Value Style Score (which evaluates both traditional and unconventional valuation metrics) organizes stocks into five groups ranging from A to F (A is better than B; B is better than C; and so on), making it helpful in identifying whether a stock is overvalued, rightly valued, or temporarily undervalued.

PulteGroup is graded B on this front, indicating that it is trading at a discount to its peers. Click here to see the values of some of the valuation metrics that have driven this grade.

Conclusion

The facts discussed here and much other information on Zacks.com might help determine whether or not it's worthwhile paying attention to the market buzz about PulteGroup. However, its Zacks Rank #3 does suggest that it may perform in line with the broader market in the near term.

Zacks Investment Research

The latest trading session saw Lennar (LEN) ending at $171.41, denoting a +1.61% adjustment from its last day's close. This move outpaced the S&P 500's daily gain of 0.74%.

Heading into today, shares of the homebuilder had lost 6.51% over the past month, lagging the Construction sector's gain of 3.47% and the S&P 500's gain of 3.16% in that time.

Market participants will be closely following the financial results of Lennar in its upcoming release. On that day, Lennar is projected to report earnings of $4.22 per share, which would represent a year-over-year decline of 18.38%. Simultaneously, our latest consensus estimate expects the revenue to be $10.16 billion, showing a 7.4% drop compared to the year-ago quarter.

Regarding the entire year, the Zacks Consensus Estimates forecast earnings of $14.18 per share and revenue of $35.64 billion, indicating changes of -0.49% and +4.11%, respectively, compared to the previous year.

Furthermore, it would be beneficial for investors to monitor any recent shifts in analyst projections for Lennar. These latest adjustments often mirror the shifting dynamics of short-term business patterns. As a result, upbeat changes in estimates indicate analysts' favorable outlook on the company's business health and profitability.

Our research shows that these estimate changes are directly correlated with near-term stock prices. To capitalize on this, we've crafted the Zacks Rank, a unique model that incorporates these estimate changes and offers a practical rating system.

The Zacks Rank system, which varies between #1 (Strong Buy) and #5 (Strong Sell), carries an impressive track record of exceeding expectations, confirmed by external audits, with stocks at #1 delivering an average annual return of +25% since 1988. Over the past month, there's been a 0.7% fall in the Zacks Consensus EPS estimate. Lennar is currently sporting a Zacks Rank of #3 (Hold).

In terms of valuation, Lennar is presently being traded at a Forward P/E ratio of 11.89. This denotes a premium relative to the industry's average Forward P/E of 9.56.

We can additionally observe that LEN currently boasts a PEG ratio of 1.58. This popular metric is similar to the widely-known P/E ratio, with the difference being that the PEG ratio also takes into account the company's expected earnings growth rate. The Building Products - Home Builders industry had an average PEG ratio of 0.95 as trading concluded yesterday.

The Building Products - Home Builders industry is part of the Construction sector. With its current Zacks Industry Rank of 43, this industry ranks in the top 18% of all industries, numbering over 250.

The Zacks Industry Rank evaluates the power of our distinct industry groups by determining the average Zacks Rank of the individual stocks forming the groups. Our research shows that the top 50% rated industries outperform the bottom half by a factor of 2 to 1.

Zacks Investment Research