Credit Snapshot: PulteGroup (PHM)

We summarize the credit fundamentals of PulteGroup.

May 07, 2025

Credit Trend: Stable

Summary credit profile:

As the #3 homebuilder in the US behind D.R. Horton and Lennar, Pulte (PHM) historically was able to boast “industry-leading gross margins” as evidence of its operating strengths. For financial risk, PHM posted a cash hoard now just slightly below homebuilding debt. Net debt % cap of 2.8% at 1Q25 and total debt leverage of 11.8% run alongside a $1.2 bn unrestricted cash level as the peak selling season unfolds. Cash + inventory of 8.7x debt drives home an impressive cushion of asset protection. The high margins, low leverage, balance sheet liquidity, and asset coverage metrics make for a single A tier profile that has lagged at the agencies (see Credit Crib Note: PulteGroup 8-11-24).

PHM has an impressive track record across the deep recession following the systemic crisis, housing sector downturn, the COVID turmoil, and the 2022-2023 tightening cycle and related spike in mortgage rates. Like most builders, they are entering a period of weaker volumes in 2025 and will see some margin pressure (modest in PHMs case). Even with the credit metrics stabilizing overall, PHM should be up in the single A tier alongside D.R. Horton and NVR.

Relative Value:

As noted, Pulte should follow the recent D.R. Horton and NVR upgrades into the single A tier of the index. They have minimal refinancing needs, but they have a more interesting mix of higher coupon bonds beyond 2030 given some legacy call-protected bonds issued in the early 2000s. PHM is less risky than numerous single A tier names if rational metrics and consistent business risk standards are applied relative to fixed cost-intensive industrial and cyclical issuers. We like the higher coupon bonds in the PHM mix with 2032 to 2035 maturities for income and credit stability.

PHM has 4 bonds in the index with 3 of the bonds (7.875% of 2032, 6.375% of 2033, 6.0% of 2035) issued early in the millennium that carried strong make-whole protection and are currently at par-plus levels. Those bonds have seen some wild times along the trail as PHM navigated the housing bubble and ensuing sector collapse (Pulte and Centex merged in 2009 in an all-stock deal). We see those bonds as worth holding tight in 2025 for the home stretch. They are solid and safe income holdings. If they are ever available in secondary markets, they are easy to get comfortable with in terms of credit risk even if builder equities take a beating.

The 7.857% bond was carrying a very high premium (13 points to start May 2025) that puts an asterisk on relative value, but that bond is not one for owners to worry about regardless of where the cycle heads. PHM also has a short $251 mn bond due in March 2026, so refi needs are minor near term.

Business Risk:

PHM still is very involved in land development but has posted exceptional results while doing so. Some of the theoretically riskiest markets since the housing bubble were seen in recent years on rising mortgage rates, but most builders pushed right through. PHM’s ability to navigate such a market is clear in the earnings and cash flow trends. PHM is well positioned across product tiers with 60% in Move-up (38%) and Active Adult (22%) with 40% first-time for FY 2024. The Del Webb brand has always ranked among leaders in the Active Adult (55+) space.

The working capital management flexibility and strong balance sheet of Pulte makes this a very safe name in the context of the BBB tier industry mix. That is notably the case vs. high fixed cost manufacturers and commodity exposed names. PHM is also well positioned vs. peers exposed to the homebuilding sector (suppliers or builders).

Tariffs:

Most of the homebuilders downplay the tariff threat on their earnings calls, but their voices are heard through their trade groups. The NAHB has made it clear that tariff-related cost pressures will have an adverse impact on their business in the form of direct costs and in terms of cyclical anxiety and the willingness of homebuyers to transact. The NAHB has offered ample details on tariff headwinds including material cost increases tied to country or product-specific tariffs on Canada (lumber, aluminum. steel) and Mexico (gypsum). Tariffs on a wide range of components/supplies from Asia also factor in.

The builders can work with their trade partners to share the burden and can mitigate the cost impact in their design and pricing decisions. Major builders are critical downstream customers for suppliers and can offer long-term reliable, recurring annual revenues. That means leverage at the negotiating table on which costs are “shared” (“eaten by”) trade partners. For the builders, the monthly mortgage payment strain, together with rising materials and labor costs, make for tough trade-offs with pricing and incentive programs which also weigh on gross margins.

Profitability:

The trend line in early 2025 is clearly showing some cyclical weakness, and Pulte is feeling some mild pressure on its margins from a higher level while still beating homebuilder peers (margin convergence with Toll Brothers at the top of the group). With average selling prices of $570K, PHM is in the upper quartile of the major builders as ASPs increased in 1Q25 after rising in FY 2024. The reality in 2025 so far is that closings, net orders, and backlogs are all lower, so the slowdown in housing is here for PHM also. As detailed in the charts below, gross margins peaked in FY 2022 at over 30%, but current margins remain well above pre-COVID levels. PHM is guiding to 26% handle margins for FY 2025.

Segments are mixed by regions with 3 of the 6 geographic segments posting lower earnings in 1Q25. That comes after FY 2024 posted 4 higher and 2 lower. The numbers can vary based on community counts and regional working capital management. Consumer sector health, sentiment surveys, and potential pressure from tariffs are all on the short list to monitor for housing sector headwinds. Mortgage rates have swung in a 200 bps range since fall 2023, so that is a wildcard in affordability with very favorable demographics still the main positive factor in homebuilding that mitigates downside risk.

Balance sheet:

Excess balance sheet liquidity relative to debt and impressive inventory coverage of total debt tells a clear story of low financial risk. The strong leverage measures of 2.8% net debt to cap and “cash + inventory” coverage of 8.7x debt comes despite PHM’s aggressive stock repurchase activity and steady dividends. PHM no longer sets a target leverage range and will use free cash flow and capital allocation priorities as a guide in its debt levels.

Cash flows and capital allocation:

High land investment, stock buybacks, and a rising dividend did not deter PHM from lowering its total homebuilding debt by over 40% since 2019 as PHM’s net income tripled and stock buybacks quadrupled. That makes for a good credit story when capital allocation can be so favorably balanced across lower debt and higher shareholder rewards.

During 2024, PHM allocated around $5.3 bn to land acquisition and development. For 2025 the expectation is for a decline to $5.0 bn, but they emphasize that can go higher or lower subject to market conditions. For stock buybacks, PHM has a lot of room to maneuver after $300 mn in 1Q25 with authorization as high as $1.9 bn. That would dwarf historical buybacks. With over $20 bn in market cap, a 5% buyout rate would be in line with some larger peers. At a 7% buyback, that would be higher than the peak buyback of FY 2024 of $1.2 bn.