Has PulteGroup Become the Perfect Stock?
Jan 10th 2012 10:24AM
Updated Jan 10th 2012 4:28PM
Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?
One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if PulteGroup (NYS: PHM) fits the bill.
The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:
- Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
- Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
- Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
- Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
- Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
- Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.
With those factors in mind, let's take a closer look at PulteGroup.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||(23%)||Fail|
|1-Year Revenue Growth > 12%||(20.6%)||Fail|
|Margins||Gross Margin > 35%||12.9%||Fail|
|Net Margin > 15%||(9.6%)||Fail|
|Balance Sheet||Debt to Equity < 50%||175.9%||Fail|
|Current Ratio > 1.3||3.38||Pass|
|Opportunities||Return on Equity > 15%||(18.5%)||Fail|
|Valuation||Normalized P/E < 20||NM||NM|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||1 out of 9|
Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.
Since we looked at PulteGroup last year, the homebuilder has actually lost a point. 2010's sales growth gave way to further declines in 2011, although some recent signs of life in housing may finally have Pulte close to hitting bottom.
Pulte is a mere shell of its former self. The company's revenue over the past 12 months is just over a quarter of the levels it hit in 2005 at the peak of the housing boom, and Pulte hasn't turned an annual profit since 2006.
But recent data suggest that things may finally be poised to turn around. A couple weeks ago, the National Association of Realtors released November pending sales data that hit a one-and-a-half year high. Even with most homebuilders losing money, they're losing less than they did during the worst of the housing slump.
Pulte, however, may not benefit as much as its peers. Standard Pacific (NYS: SPF) had a 38% jump in its net new orders, and Beazer Homes (NYS: BZH) saw orders rise 33% early in its fourth quarter. By contrast, Pulte's orders were roughly flat.
The other danger sign comes from falling backlogs of orders. In the third quarter, Pulte's backlog dropped 4%. That stands in stark contrast to conditions at KB Home (NYS: KBH) and Hovnanian Enterprises (NYS: HOV) , where backlogs rose 22% and 14%, respectively.
For Pulte to turn things around, it has a lot of work to do. With the company losing the competitive battle within the industry, Pulte needs to figure out how to raise customer interest and match up against its rivals before it digs a hole too deep to get out of.
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.
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At the time this article was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.
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