Pulte Home: “Plenty of Upside” Ahead, Says Ticonderoga

By Avi Salzman

Pulte Home (PHM) shares are trading hands at such low prices that investors appear to be factoring in a much larger erosion in home prices, writes Ticonderoga Securities analyst Stephen East in a note today upgrading the stock to Buy from Neutral.
Pulte’s management has changed its strategy for the better as the market has slumped, East asserts. The company “recognizes it can no longer make money only from land, but instead must make it off the construction of each house, regardless of the land dynamics.” Also, Pulte appears to realize that it needs to become more efficient and focus on generating cash.
Certainly, Pulte is vulnerable to a larger pullback in the housing market, but East doesn’t expect that to happen. “[W]e doubt new home sales drop much more given that we are still seeing household formation slightly above current sales rates. Thus we think while the issue is real, the large discount to book already accounts for this possibility.”
Investors could wait for more clarity, but by then the shares might not be at such a discount, East argues.
“The shares trade at very modest multiples on nearly every multiple. Our Normalized EPS forecast implies the shares trade at only 5.3X, a 49% discount to the group. On a book value multiple basis the discount is nearly as striking. The shares trade at an Historically Equivalent BV multiple of only .41X, a 54% discount to the group.”
Pulte was up 8.4% in midday trading.