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Are Robust Financials Driving The Recent Rally In PulteGroup, Inc.'s (NYSE:PHM) Stock?
Most readers would already be aware that PulteGroup's (NYSE:PHM) stock increased significantly by 23% over the past three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Particularly, we will be paying attention to PulteGroup's ROE today.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
See our latest analysis for PulteGroup
How Do You Calculate Return On Equity?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for PulteGroup is:
29% = US$2.6b ÷ US$8.9b (Based on the trailing twelve months to December 2022).
The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.29 in profit.
Why Is ROE Important For Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.
A Side By Side comparison of PulteGroup's Earnings Growth And 29% ROE
To begin with, PulteGroup has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 20% the company's ROE is quite impressive. Under the circumstances, PulteGroup's considerable five year net income growth of 28% was to be expected.
Next, on comparing PulteGroup's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 30% in the same period.
Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Is PulteGroup fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is PulteGroup Efficiently Re-investing Its Profits?
PulteGroup's three-year median payout ratio to shareholders is 8.4%, which is quite low. This implies that the company is retaining 92% of its profits. This suggests that the management is reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.
Additionally, PulteGroup has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 8.0% of its profits over the next three years. However, PulteGroup's future ROE is expected to decline to 16% despite there being not much change anticipated in the company's payout ratio.
Conclusion
Overall, we are quite pleased with PulteGroup's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. That being so, according to the latest industry analyst forecasts, the company's earnings are expected to shrink in the future. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
What are the risks and opportunities for PulteGroup?
PulteGroup, Inc., through its subsidiaries, primarily engages in the homebuilding business in the United States.
Rewards
Price-To-Earnings ratio (4.9x) is below the US market (13.9x)
Earnings grew by 34.8% over the past year
Risks
Earnings are forecast to decline by an average of 28.6% per year for the next 3 years
High level of non-cash earnings
Significant insider selling over the past 3 months
Further research on
PulteGroup
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
About NYSE:PHM
PulteGroup
PulteGroup, Inc., through its subsidiaries, primarily engages in the homebuilding business in the United States.
Flawless balance sheet with solid track record and pays a dividend.
