PHM

Here's Why Pulte (PHM) Is a Defensive Stock According to the Graham Test

Pulte meets some but not all of Benjamin Graham's requirements for a defensive stock. The Residential Construction company does not offer a large enough margin of safety for cautious investors, but it does have many qualities that may interest more enterprising investors.

Pulte Trades at Fair Multiples

The “Graham number” is an equation that enables us to quickly determine how a stock is valued in terms of its earnings and assets:

√(22.5 * 6 year average earnings per share (5.26) * 6 year average book value per share (44.135) = $88.15

Despite its solid 73.0% performance over the 12 months, Pulte still provides a margin of safety because its Graham number is -20.0% above its current price of $70.54 per share. Some people use the Graham number alone, but it is best to consider it together with the other requirements for defensive stocks that Graham listed in Chapter 14 of The Intelligent Investor.

Negative Retained Earnings In 2010 And 2011, A Solid Record Of Dividends, and Eps Growth In Excess Of Graham'S Requirements

Ben Graham wrote that an investment in a company with a record of positive retained earnings could contribute significantly to the margin of safety. However, Pulte had negative retained earnings in 2010 and 2011 with an average of $1.57 Billion over this period.

Another one of Graham's requirements is for a 30% or more cumulative growth rate of the company's earnings per share over the last ten years.To determine Pulte's EPS growth over time, we will average out its EPS for 2008, 2009, and 2010, which were $-5.81, $-3.94, and $-0.44 respectively. This gives us an average of $-3.40 for the period of 2008 to 2010. Next, we compare this value with the average EPS reported in 2020, 2021, and 2022, which were $1.62, $7.43, and $11.01, for an average of $6.69. Now we see that Pulte's EPS growth was 296.76% during this period, which satisfies Ben Graham's requirement.

Shareholders of Pulte have received regular dividends since 2008. The company has returned an average dividend yield of 1.2% over the last five years.

Pulte’s Balance Sheet Meets Graham’s Criteria

It was also essential to Graham that the company’s current assets outweigh its current liabilities, and that its long term debt be inferior to the sum of its net current assets (current assets minus total liabilities). This is the aspect of the analysis that most companies fail, yet Pulte passes comfortably, with an average current ratio of 4.3, and average debt to net current asset ratio of 0.4.

Conclusion

Pulte offers a decent combination of value, growth, and profitability. These factors imply that the investment offers a decent margin of safety — especially if the shares are bought during a sell-off.

2018-02-07 2019-01-31 2020-01-30 2021-02-02 2022-02-07 2023-02-06
Revenue (MM) $8,573 $10,188 $10,213 $11,036 $13,927 $16,229
Gross Margins 23.0% 25.0% 25.0% 27.0% 28.0% 31.0%
Operating Margins 11% 13% 13% 16% 18% 21%
Net Margins 5.0% 10.0% 10.0% 13.0% 14.0% 16.0%
Net Income (MM) $447 $1,022 $1,017 $1,407 $1,946 $2,617
Earnings Per Share $1.46 $3.59 $3.69 $5.22 $7.52 $10.07
EPS Growth n/a 145.89% 2.79% 41.46% 44.06% 33.91%
Diluted Shares (MM) 307 285 275 269 259 260
Free Cash Flow (MM) $695 $1,507 $1,134 $1,843 $1,077 $781
Capital Expenditures (MM) -$32 -$59 -$58 -$58 -$73 -$113
Net Current Assets (MM) n/a n/a n/a n/a $5,994 $7,258
Long Term Debt (MM) n/a n/a n/a n/a $2,655 $2,632
The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.

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