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Investing.com -- Moody’s Ratings has upgraded the senior unsecured notes ratings of PulteGroup (NYSE:PHM), Inc. (Pulte) to Baa1 from Baa2 and shifted the outlook to stable from positive. The upgrade is a reflection of Pulte’s conservative financial strategy, including its consistent maintenance of debt to book capitalization at or below 20% since 2021.
Over the past four years, Pulte has reduced debt by $1.1 billion through cash flow. Combined with an increase in net worth, this has resulted in a leverage of 12.5% debt to book capitalization as of December 31, 2024, one of the lowest among its peers. Pulte plans to continue operating with leverage more conservative than its previous target of 20% to 30%.
Pulte’s low debt leverage and conservative financial profile provide a significant buffer against any potential market downturns, according to Natalia Gluschuk, Moody’s Vice President and Senior Credit Officer. The company’s strong gross margin profile, robust market share position as the third largest builder in the country, and significant financial flexibility due to its low leverage, strong free cash flow and liquidity also contributed to the ratings upgrade.
Pulte’s Baa1 senior unsecured rating is supported by its strong market position, excellent gross margins, conservative financial strategies, meaningful tangible equity base of $12 billion, and its build-to-order operating strategy. However, the credit profile is constrained by the company’s shareholder-friendly activities, land position, affordability pressures in the sector, and the cyclicality of the homebuilding industry.
The stable outlook is based on expectations that Pulte can maintain low leverage and high gross margins even if market conditions were to unexpectedly weaken. Pulte’s strong liquidity is supported by $1.6 billion of cash on balance sheet as of December 31, 2024, robust cash flow from operations, and significant availability under its $1.3 billion senior unsecured revolving credit facility maturing in June 2027.
Potential factors that could lead to an upgrade include demonstrated resilience through homebuilding sector cycles, maintenance of conservative financial policies, growth in scale, and maintenance of excellent gross margins, robust free cash flow, and strong liquidity. Conversely, factors that could lead to a downgrade include the homebuilding sector experiencing a material weakening, a shift from the commitment to conservative financial strategies, debt to book capitalization rising above 25% for a sustained period of time, or a weakening in free cash flow or liquidity profile.
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