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Is Lennar a Better Housing Stock than Pulte Now?

2015 was more or less a good year for the housing market, possibly the best since 2007 when the housing recession set in. Though 2016 started on a shaky note amid equity market volatility and global concerns, the housing fundamentals seem positive for the rest of the year supported by improving economic environment in the U.S. and steady job and wage growth.

PulteGroup, Inc. PHM and Lennar Corporation LEN are big names in the housing space. While homebuilding accounts for almost 98% of Pulte’s sales, Lennar’s business is more diversified with homebuilding making up close to 85% of its revenues. Lennar has a market cap of more than $9 billion while Pulte has more than $6 billion.

So does that make Lennar a better stock than Pulte? Let’s find out.

What Defines These Two Housing Giants?

While Lennar’s Homebuilding and Financial Services divisions are the primary drivers of near-term revenues and earnings, its three ancillary businesses – Rialto, Multi-Family and FivePoint Communities – provide diversification as well as complementary long-term growth opportunities.

Based in Miami, FL, Lennar is also one of the best positioned homebuilders to capitalize on the housing recovery driven by diverse revenue mix, strategic land investments and above-average order growth. Moreover, its ancillary platforms are on an evolutionary path and should improve further in 2016.

Based in Atlanta, GA, Pulte, offers homes under three brands - Dell Webb for active adult buyers, Pulte for move-up buyers and Centex for first-time buyers. Pulte's large-scale business and geographic/product diversity, consistently improving profitability, and commitment to drive higher returns while pursuing a more balanced capital allocation approach are encouraging.

How have the Results Been?

After a strong performance in 2014, Lennar delivered outstanding operating results in fiscal 2015 (ending on Nov 30). Moreover, it began 2016 on a strong note beating the Zacks Consensus Estimate for both earnings and sales in the first quarter, results of which were announced on Mar 29. Adjusted earnings increased 26% year over year driven by strong revenues, improved SG&A leverage and a lower tax rate. Revenues grew 21% driven by strong homebuilding revenues.

With the housing sector and the overall macro environment looking strong, Lennar is poised for continued strong performance in 2016.

After a weak performance in the first three quarters of 2015, Pulte delivered better-than-expected results in the fourth quarter (results announced in Jan). The upside was driven by improvement in home deliveries, order trends, sales pace, ASPs and gross margins as overall demand trends remained positive. The homebuilder reports first quarter results later this month.

Pulte is likely to do well in 2016, benefitting from steady demand trends, prudent land investments, focus on higher-return business and the Wieland acquisition (Jan 2016).

Share Price, Key Metrics and Estimate Revision

Both stocks have a Zacks Rank #3 (Hold).

In terms of share price, it is kind of a tie. While Lennar has lost 2.4% year-to-date, Pulte has gained 1.4%. However, last year, Pulte lost 15% while Lennar’s shares gained 11%.

As regards current year and long-term EPS growth, Pulte seems to have the advantage. Pulte’s current year EPS growth rate is 21.17%, while that of Lennar is 11.34%. Lennar’s long term EPS growth rate is 8.75% while Pulte’s is much higher at 15.27%.

But both stocks are a tad overvalued as is evident from their unfavorable P/E, P/B and P/S ratios compared to the homebuilding industry.

Pulte’s and Lennar’s price to earnings (P/E) ratios are 11.18 and 12.16, respectively, while for the industry it is 10.76. Similarly, price to sales (P/S) ratios for Pulte and Lennar are 1.0 and 1.01, respectively, both at a premium to the industry’s 0.6. The price to book (P/B) ratio for Pulte is 1.26 while that for Lennar is 1.67, higher than 1.10 for the industry. However, Lennar’s shares look a little more expensive compared with Pulte. Its P/E, P/S and P/B ratios are relatively higher than Pulte’s.

Over the last 30 days, Pulte’s earnings estimates per share for 2016 and 2017 have been unchanged at $1.54 and $1.87, respectively. For Lennar, the 2016 earnings per share estimate were raised by 3 cents to $3.85, while that for 2014 was narrowed by 1 cent to $4.24.

So Which One is Better?

While Lennar has been doing well since the past two years, Pulte has just done well in the last quarter of 2015 after weaker performance earlier in the year. Moreover, its order trends declined in both 2013 and 2014 in contrast to increases witnessed by most of its peers. Pulte is however showing prospects of better growth in 2016.

But Pulte finds itself in the middle of a founder/board battle for control of the company.

Its founder and largest shareholder, William J. Pulte, made public a letter to the board of directors this Monday recommending the immediate removal of longtime CEO, Richard Dugas’ and a change in the company’s direction. Bill Pulte, his grandson and another board member, Jim Grosfeld’s, criticized Dugas’ decision to move to Atlanta and the company’s overall performance/ strategy.

In response, lead independent director, James J. Postl, issued an open letter to shareholders. In the letter to shareholders, the board strongly supported Dugas and the company’s value creation strategy which they claim “has produced significantly higher profitability and shareholder returns”.

Pulte’s share price declined more than 6% on Monday, the day the founder’s letter became public. Amid the CEO/founder feud, Pulte’s shares can be avoided for the short term. Challenges like labor shortages, gross margin compression and sales slowdown in the Texas/Houston region due to the oil carnage will persist this year as well for both.

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PULTE GROUP ONC (PHM): Free Stock Analysis Report
 
LENNAR CORP -A (LEN): Free Stock Analysis Report
 
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