Wall Street's recent disgust with homebuilders cooled a bit Monday following positive research on
and a stronger-than-expected housing report.
Pulte, whose travails in the Las Vegas real estate market sparked a sector selloff and lopped 23% off its own shares this month, was upgraded by Credit Suisse First Boston ahead of its earnings report later today. CSFB analysts Ivy Zelman raised her rating to outperform from neutral, recently sending the stock up $3.54, or 7.5%, to $51.
In a note, Zelman said Pulte is trading at only 5.5 times its 2005 earnings estimate and 1.4 times its projected year-end book value for 2004 in the wake of the October selloff. Meanwhile, its industry peers are trading at 6.2 times 2005 estimates and 1.6 times their expected 2004 book value.
"While the company's recent experience in Las Vegas underscores our longer-term concern with management's aggressive growth plans, we believe the stock's decline of 23% since the beginning of the month compared to its peers' 7% average decrease already reflects that risk," wrote Zelman.
In the first week of October, Pulte lowered third-quarter and full-year earnings expectations, citing sluggish sales from its southern Nevada developments. The builder cut new home prices in Las Vegas, abruptly abandoning aggressive increases that helped drive up housing costs by tens of thousands of dollars.
The announcement was widely viewed as a sign on Wall Street that concerns about a bursting bubble in the U.S. housing market, one of the economic stalwarts of the postbubble economy, might come true.
"People have been waiting for earnings to stop growing at these companies, and they've been sort of incredulous when they have not stopped growing," said Larry Horan, an analyst with Parker/Hunter. "So, any news that gives a peek under the curtain that it's starting to happen will cause stocks to correct as Pulte did."
Pulte's third-quarter earnings due out after the bell are expected to show a 69% gain to $2 a share, up from $1.18 a share in the same quarter last year.
Zelman pointed out that Pulte is one of the most geographically diverse builders, making it a less-risky stock than its peers, which include
. Only 23% of its profits come from California, a place where prices have jumped especially high in recent years, and its two largest markets make up less than 40% of its business. Also, 40% of its sales are geared toward retirees, viewed as a stable customer base that is more insulated against the rising interest rate environment than younger home buyers.
"Pulte's earnings are more sustainable in the event of a housing slowdown, and
we view its downside risk to be less than that of most of its industry peers," Zelman wrote.
Separately, the National Association of Realtors said U.S. sales of previously owned houses rose 3.1% in September to an annual rate of 6.75 million. Analysts expected resales to fall to 6.51 million last month from the 6.54 million reported for August, a figure that was revised up to 6.55 million. The Census Bureau will report new-home sales Wednesday, but the latest data speak to continued strength in housing.