April 18, 2016 / 9:00 PM / 4 years ago

PulteGroup feud not deterring investors

NEW YORK, April 18 (Reuters) - Investors may be warming to homebuilder PulteGroup, even though the company has been underperforming its Wall Street peers and its namesake founder is locked in battle with the company’s chief executive officer and many of its directors.

With shares down more than 15 percent over the past year, dwarfing the 1.4 percent decline in the S&P Homebuilders Select Industry Index, PulteGroup founder and biggest shareholder William Pulte is pushing the board to quickly oust CEO Richard Dugas, who recently announced plans to retire in May 2017.

Pulte, who owns 8.97 percent of the company’s shares, and joined by his grandson Bill Pulte, has faulted Dugas for a leadership style and strategy that he said has led the company’s stock to sharply underperform its competitors.

But some analysts and investors see opportunity. Short interest in the stock is down, and the company has done slightly better than its peers on Wall Street this year.

“We think this reflects investors’ excitement at a potential pivot to growth,” Deutsche Bank said in a research report published Friday that pointed to a recent uptick in orders and construction of new communities.

PulteGroup’s annual shareholder meeting is scheduled for May 4, but the Pulte family is not expecting a quick resolution to the call for change at the top.

The company’s board members, most of whom were appointed by Dugas, are expected to be reelected at the meeting and continue to clash with the founder’s vision for the company, Bill Pulte said.

“This is just the beginning of what unfortunately seems like a long process,” he said.

In the meantime, the decline in the stock has bumped Pulte’s dividend up to an attractive 1.93 percent yield and positioned the company, typically premium priced compared to competitors such as Lennar Corporation and D.R. Horton Inc., as a cheap buy. Pulte stock is now selling at roughly 11 times expected earnings for the next 12 months, compared with its typical forward PE of almost 16.

“PHM now trades at a discount to these same large-cap peers, which we believe more than sufficiently discounts any management-related uncertainty,” Barclays Research said in a note this month. It has upgraded PulteGroup to equal weight from underweight.

Short interest in PulteGroup has fallen from a near two-year high of 9.8 percent of outstanding shares at the start of February, to 6.75 percent now, according to Astec Analytics data.

On April 4, when Dugas, who was already under pressure from William Pulte, announced his 2017 retirement plans, shares fell as much as 9.8 percent before closing down 6.6 percent.

On that day, William Pulte wrote a letter condemning the company’s board of directors for failing to immediately push out Dugas.

Pulte said Dugas had been overly aggressive with land purchases, lost talented employees who went to work for competitors and spent too much on dividend payouts and share buybacks.

PulteGroup has defended Dugas, who has been CEO since 2003, noting that since 2012 he has helped the company boost income, cut debt and - in 2015 - returned $559 million to shareholders through dividends and share repurchases.

The public dispute doesn’t threaten the company’s fundamentals, said Jack Micenko, deputy director of research at Susquehanna Financial Group, who maintains a “buy” rating for PulteGroup.

“It’s a bit of a soap opera,” he said. (Reporting by Laila Kearney; Editing by Linda Stern and Leslie Adler)

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