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Pulte Board Responds to Founder's Letter; Supports Dugas

A day after the founder and largest shareholder of PulteGroup, Inc. PHM, William J. Pulte, made public a letter to the board of directors demanding CEO Richard Dugas’ immediate removal, lead independent director, James J. Postl, issued an open letter to shareholders.

Pulte owns 8.8% of PulteGroup shares.

The board’s letter states that it will adhere to the value creation strategy and support CEO Dugas.

On Monday, Pulte sent a letter to the company’s board recommending the immediate removal of Dugas and a change in the company’s direction.

Earlier the same day, the homebuilder issued a press release announcing that Dugas has informed the board of his intention to retire as Chairman and CEO effective May 2017. His decision was in response to Pulte, his grandson and another board member, Jim Grosfeld’s, demands for a CEO change. Dugas agreed to step down to avoid “a contested public battle” which would be against shareholders’ interests. However, in his letter, the founder expressed disappointment with the year-long succession plan and asked the board to accelerate the process.

The company’s insignificant stock price appreciation since Dugas’ appointment, irresponsible laying off of key employees and the costly shift of headquarters from suburban Detroit to Atlanta were some of the reasons behind the Pultes’ demand. PulteGroup’s sales have been rather soft compared with other homebuilders despite the steady recovery in the housing market. The company has instead focused on driving margins, greater overhead leverage, increasing asset efficiency and disciplined capital allocation.

In addition, the board decided not to nominate James Grosfeld as a candidate for the position of director at the upcoming annual general meeting because of his differing views with other independent directors. Grosfeld, former PulteGroup CEO, joined the board last December on Pulte’s suggestion, who strongly criticized the decision.

In the letter to shareholders, the board strongly supported CEO Dugas and the company’s value creation strategy which they claim “has produced significantly higher profitability and shareholder returns”.

The letter states that Pulte, in a private meeting with Dugas on Mar 21, in the presence of his grandson and Grosfeld, criticized Dugas’ decision to move to Atlanta and the company’s performance/ strategy. Dugas was asked to retire in the near term which, if not agreed to, would lead to a "war".

Thereafter, two of PulteGroup's independent directors met the Pultes and Grosfeld. At this meeting, the Pultes/Grosfeld demanded Dugas’ resignation within seven days and Grosfeld to be nominated for election as a director. They also suggested adding two new directors chosen by the Pulte/ Grosfeld. This irresponsible behavior by Grosfeld prompted the board’s decision to not re-nominate him for the elections.

Dugas has been with the company for more than two decades and served as the CEO for the last 13 years. While the board strongly supports Dugas, Pulte feels that he has shown “lack of performance and repeated bad decision-making”.

PulteGroup carries a Zacks Rank #3 (Hold). A couple of homebuilders worth considering are KB Home KBH and Hovnanian Enterprises Inc. HOV. Both the stocks have a Zacks Rank #2 (Buy). In the broader construction sector, Headwaters Incorporated HW sporting a Zacks Rank #1 (Strong Buy) is also worth a look.

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HEADWATERS INC (HW): Free Stock Analysis Report
PULTE GROUP ONC (PHM): Free Stock Analysis Report
KB HOME (KBH): Free Stock Analysis Report
HOVNANIAN ENTRP (HOV): Free Stock Analysis Report
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