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Pulte Founder Sends New Letter; Stresses Dugas' Removal

The public battle between PulteGroup, Inc.’s PHM board of directors and founder and the largest shareholder, William J. Pulte is heating up.

Pulte sent a fresh letter to the board stating that hiring CEO Richard Dugas in 2003 was the biggest mistake of his career.

Last week, Pulte made public a letter to the board of directors recommending the immediate removal of the long-time CEO and a change in the company’s direction. Bill Pulte, his grandson, and another board member, Jim Grosfeld’s, criticized Dugas’ decision to move the company’s headquarters to Atlanta and the company’s overall performance/ strategy.

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

Also, last week, 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 Grosfeld’s demands for a CEO change. However, in his letter, the founder expressed disappointment with the year-long succession plan and asked the board to accelerate the process.

Pulte owns 8.8% of PulteGroup shares.

In his latest letter, Pulte stated that though Dugas’ first few years after taking office were “economically strong ones’’ PulteGroup's overly aggressive land purchases in the later years led to significant losses.

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. The founder’s latest letter says that over the last 12 years with Dugas at the helm, there has been no “value creation”. PulteGroup’s sales dropped from approximately $9 billion to roughly $5.98 billion, incurred $530 million in cumulative losses, and fell from the position of #1 homebuilder to #3 over that time frame.

In addition, the board decided not to nominate 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 latest letter, the founder said that the board members probably “felt threatened” by Grosfeld’s experience in homebuilding and his ideas for the company, and decided to not allow him to contest the elections.

In response to the founder’s recent letter, PulteGroup issued a fresh statement highlighting its disappointment in the Pultes’ attempt to “destabilize the company's leadership and derail the successful value creation strategy’’ through such public statements.

PulteGroup carries a Zacks Rank #3 (Hold). Better-ranked homebuilders worth considering are KB Home KBH, Meritage Homes Corporation MTH and Hovnanian Enterprises Inc. HOV. All the stocks have a Zacks Rank #2 (Buy).

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PULTE GROUP ONC (PHM): Free Stock Analysis Report
KB HOME (KBH): Free Stock Analysis Report
HOVNANIAN ENTRP (HOV): Free Stock Analysis Report
MERITAGE HOMES (MTH): Free Stock Analysis Report
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