Benign Growth For PulteGroup, Inc. (NYSE:PHM) Underpins Its Share Price

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") above 19x, you may consider PulteGroup, Inc. (NYSE:PHM) as an attractive investment with its 9.6x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

PulteGroup certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

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How Is PulteGroup's Growth Trending?

There's an inherent assumption that a company should underperform the market for P/E ratios like PulteGroup's to be considered reasonable.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 8.6% last year. The latest three year period has also seen an excellent 119% overall rise in EPS, aided somewhat by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to climb by 1.3% per year during the coming three years according to the twelve analysts following the company. With the market predicted to deliver 10% growth per annum, the company is positioned for a weaker earnings result.

In light of this, it's understandable that PulteGroup's P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Final Word

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that PulteGroup maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

Before you settle on your opinion, we've discovered 1 warning sign for PulteGroup that you should be aware of.

If you're unsure about the strength of PulteGroup's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.

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