Raymond James Downgrades PulteGroup, Believes 'Overhangs Linger'

Raymond James has downgraded PulteGroup, Inc. (NYSE: PHM) to Market Perform from Outperform on the CEO succession issues, potential gross margin pressures and drop in absorption rates.

The Atlanta, Georgia-based homebuilder is embroiled in an ongoing saga between the company's founder and its current CEO. Bill Pulte, PulteGroup's founder, former chairman and ex-CEO recently penned a letter to the company's board of directors in which he displayed his "extreme disappointment in the leadership of CEO Richard Dugas and the lack of performance of PulteGroup under his watch."

Dugas has since announced he will retire from the company as CEO – but only in May 2017. The issue could create "organizational uncertainty" in the view of analyst Buck Horne.

Meanwhile, Horne noted that the company's reluctance to raise full-year gross margin outlook of 21-22 percent after first quarter upside raises the possibility that "dilution from the Wieland acquisition could be greater than expected."

In addition, the analyst was "surprised" by the drop in per-community absorption rates. Though order growth stood at 10 percent, absorption was flat after trending closer to 10 percent growth in the fourth quarter.

"With Pulte's actively selling community count expected to be up low teens y/y in 2Q16, we are somewhat perplexed by why it hasn't captured more market share this spring," Horne noted.

Though the analyst has maintained his 2016 and 2017 EPS estimates at $1.60 and $2.00, respectively, he said "we feel more comfortable taking a step back until these issues are resolved."