And yet, if you’re a PEG kind of an investor, and agree that any stock with a P/E ratio lower than its growth rate is something to consider buying, it stands to reason that you’d like PulteGroup, Inc. (NYSE:PHM) shares just as much as MDC shares, inasmuch as both stocks sell for PEG ratios of less than 1.0. Yet KeyBanc does not like Pulte as much as MDC.
The case for preferring Pulte gets even stronger as we turn to the company’s cash flow statement. There, in stark contrast to the cash-burn at MDC, we find Pulte churning out an incredible $900 million in positive free cash flow. That’s literally three times as much cash profit as PulteGroup, Inc. (NYSE:PHM) is permitted to report under GAAP accounting profits — yet every dollar of this cash profit is real, and money in the bank.
Result: I find Pulte a much more compelling buy at 10 times free cash flow and a 34% growth rate, than I do M.D.C. Holdings, Inc. (NYSE:MDC) at negative free cash flow, and growing these nonexistent cash “profits” at 50% or more per year.
Rounding on Ryland
As we turn now to the last stock on KeyBanc’s list, however, I finally find myself in agreement with the analyst on one point: The Ryland Group, Inc. (NYSE:RYL)’s not as good a deal as its peers.
The Ryland Group, Inc. (NYSE:RYL) is burning cash faster than MDC for one thing. It’s got a higher P/E ratio (36.5) than either Pulte or MDC for another.
On the one hand, it’s growing faster than MDC — with 55% annualized earnings growth projected. On the other hand… did I mention The Ryland Group, Inc. (NYSE:RYL)’s burning cash just like MDC? I did? Okay then — so that means The Ryland Group, Inc. (NYSE:RYL)’s GAAP “earnings” are of just as low quality as MDC’s.
Really, the main question that strikes me after reviewing KeyBanc’s write-ups today is why it’s recommending one cash burner, and panning another. Seems to me, the effort would be better spent focusing on the one company in this industry that’s producing truly tremendous cash profits — PulteGroup, Inc. (NYSE:PHM)– and determining whether it’s going to be able to keep repeating that feat at anything approaching its projected 34% growth rate. If it can, the stock’s a pretty obvious buy.
But even if it can’t, I think a PulteGroup producing $900 million cash profit, and growing at even as low a rate as 10% or so, would still make for a good investment.
The article Wednesday’s Top Upgrades (and Downgrades) originally appeared on Fool.com is written by Rich Smith.
Motley Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
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