AP News

PulteGroup shares up on Williams Financial upgrade

LOS ANGELES (AP) — Shares of PulteGroup Inc. surged on Wednesday, after Williams Financial Group upgraded the homebuilder, saying improved sales trends and efforts to control costs represent a likely turning point for the company.

THE SPARK: Analyst David Williams elevated the rating on PulteGroup's shares to "Buy" from "Hold," and raised his price target on the stock to $17 from $13.

Williams noted that recent sales trends suggest the builder has overcome its biggest roadblock to growth — a large portfolio of land purchased years ago — and will likely see outsized growth as housing demand improves.

THE BACKGROUND: PulteGroup was ranked the second-largest U.S. homebuilder last year, based on completed home sales. Like other builders, the Bloomfield Hills, Mich., company has seen its fortunes improve this year amid a modest recovery in housing, and is on track to turn a profit for the full year.

THE ANALYSIS: Land and home values fell after the housing bubble burst. As a result, it's often not feasible for builders to make money at today's home prices on a home built on land purchased at elevated prices during the housing boom years. Many builders have had to shelve developing communities in those land parcels until the market fully recovers.

PulteGroup has had a large inventory of land purchased several years ago, a significant portion of which it has mothballed. And that's been a key impediment to long-term growth for the builder, Williams said.

But improved sales trends this year indicate PulteGroup is making progress driving sales at its communities, which are located in 60 markets nationwide.

The company's second-quarter home orders grew 32 percent, and the builder recorded 7.5 new orders per community, on average. That has helped abate some of Williams' concerns, he wrote.

"We have been encouraged over the last couple of quarters as (PulteGroup) seems to be finally realizing the benefits from its ongoing strategies to drive improvements through its existing communities while controlling costs across the entire business," Williams wrote.

As a result, the analyst has turned more positive on his long-term outlook for PulteGroup, saying he believes that the builder has largely moved past its biggest growth impediments and will likely see outsized growth as housing demand improves.

SHARE ACTION: PulteGroup shares rose 94 cents, or 6.4 percent, to $15.61 in afternoon trading. The stock has more than doubled over the past year, but remains more than 65 percent below the $45.48 peak it hit in July 2005, before the housing crisis.

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