PulteGroup (PHM) Downgraded by BofA on Weaker Home Demand

BofA analyst Rafe Jadrosich downgraded PulteGroup (NYSE: PHM) to Neutral from Buy following the company's second-quarter earnings report, in which it topped earnings estimates but missed revenue expectations.

PulteGroup reported Q2 EPS of $2.73, $0.11 better than the analyst estimate of $2.62. Revenue for the quarter came in at $3.93 billion versus the consensus estimate of $4.06 billion.

"We see less upside to PHM shares going forward given: (1) weaker home demand, which we believe could persist through 2H22, (2) relative underperformance of built-to-order homes (70% of PHM inventory) vs. spec as buyers shift preference to quick move-in homes, and (3) less compelling valuation following the ~18% rebound in shares since mid-June," said Jadrosich. "PHM valuation is at the low-end of its historical range, but we see limited upside with earnings peaking in 2022E."

Despite the downgrade, the analyst raised the firm's price target on the stock to $48 from $41 to reflect a higher return-on-equity outlook.

"New home demand has slowed meaningfully in June and July due to the spike in mortgage rates and growing macro uncertainty," added Jadrosich. "PHM's 2Q net orders declined (23%) YoY (price +18% YoY) and (6%) from the 2Q19 level driven by weakness in the move-up segment (orders -37%) and active adult (-27%), which offset entry-level growth (+1%). Cancellation rates (15% in 2Q vs. 7% 1Q) and incentives also increased sequentially through 2Q."

PulteGroup shares rose over 2% Wednesday.

By Sam Boughedda

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