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PulteGroup Options Bulls at 9-Year High See Gain on Profit

Options traders are pushing bullish bets on PulteGroup Inc. to the highest level in nine years, speculating the biggest U.S. homebuilder will rally even as analysts predict the 18th net loss in 19 quarters.

The ratio of outstanding calls to buy the shares versus puts to sell almost doubled since April to 2-to-1 and reached 2.44 on July 15, the highest since 2002. More positions were established in January $10 calls during the past month than any other contract, sending open interest to the second-highest among options on Bloomfield Hills, Michigan-based Pulte. The shares haven’t closed above $10 since June 2010 and fell 85 percent through last week from a record high in July 2005.

Investors are betting that Pulte’s size and focus on first-time buyers and homeowners looking to upgrade will help it rebound from the housing slump faster than competitors. That may help reverse a 41 percent slide since the company bought Centex Corp. in August 2009 in the industry’s largest-ever U.S. deal.

“Investors think the worst is over,” Michael G. Smith, an analyst for JMP Securities LLC in San Francisco, said in a telephone interview. He has a “market perform” rating on the shares. “They like it because it’s been hammered more than the group in the last couple of years. It’s a cheap way to play the housing recovery, whenever it comes.”

Trailing Other Builders

Pulte shares have trailed the S&P Supercomposite Homebuilding Index since Nov. 19, 2008, tumbling 15 percent through July 22 versus the measure’s 64 percent gain. After rising 3.5 percent to $7.34 last week, Pulte is the second worst-performing stock among 12 in the S&P homebuilder index since it bought Dallas-based Centex.

Pulte shares dropped 5 cents, or 0.7 percent, to $7.29 at 4:15 p.m. in New York Stock Exchange composite trading today.

Because Pulte hasn’t reported net income since 2006, it doesn’t have a price-earnings ratio. It trades for 0.6 times sales, compared with 1.4 for the Standard & Poor’s 500 Index and 1 for the homebuilder index. The company’s July 28 quarterly report will show a loss of 4 cents a share, according to the average of 17 analysts’ estimates tracked by Bloomberg.

Pulte’s Centex purchase made it the largest U.S. homebuilder by revenue in an industry experiencing flagging demand from stricter lending practices, unemployment near a three-decade high and a glut of distressed homes weighing down values since the recession. Pulte has recorded writedowns on the deal, most recently $655 million in costs for goodwill impairment in the third quarter of 2010.

Pulte Calls

Open interest for calls to buy Pulte shares jumped 79 percent to 270,233 outstanding contracts from April 15 through last week, while puts to sell rose 33 percent to 134,167 contracts. The shares sank 6.1 percent during the same period.

“They may be betting on a stabilization, but betting on a rebound would be premature,” Stephen Wood, the New York-based chief market strategist for Russell Investments, which manages about $161 billion, said in an interview. “The overbuilding was significant so it’s going to take a long time to burn through that. We’ve seen stabilization in home prices and housing starts are up but that’s off of a very low base.”

The S&P/Case-Shiller index of property values in 20 U.S. cities remains near its eight-year low reached in March. Construction of single-family houses increased 9.4 percent to a 453,000 rate in June from May, the biggest monthly gain in two years, the Commerce Department said July 19.

New-Home Sales

The Commerce Department probably will say tomorrow that new-home sales climbed in June to a 322,000 annual pace from 319,000 the prior month, according to the median estimate of 60 analysts in a Bloomberg survey. That’s still less than half the average annual rate of 849,000 in the past 10 years.

“The key to any kind of industry recovery is really about demand, not really about supply,” Richard Dugas, chief executive officer of Pulte, said at a Credit Suisse Group AG homebuilding conference in June.

Confidence among U.S. homebuilders improved in July from a nine-month low as executives turned less pessimistic on the outlook for sales, according to the National Association of Home Builders/Wells Fargo sentiment index. The index rose to 15 from 13 in June. Readings below 50 mean more respondents said conditions were poor.

“It’s more of a directional bet on housing getting better, and Pulte being the beneficiary of that,” Jay McCanless, an analyst for Guggenheim Securities in Nashville, Tennessee, said in a telephone interview. “There’s still plenty of existing homes for sales that provide price competition for builders.”

Analyst Ratings

McCanless is one of four analysts who recommend buying the shares, according to data tracked by Bloomberg, while 15 recommend holding the shares and none say to sell. Analysts have an average share-price forecast of $8.78, according to estimates tracked by Bloomberg.

McCanless estimates that 65 percent to 70 percent of Pulte’s revenue comes from the move-up market -- existing homeowners looking to move into, often times, a larger house. That market didn’t fluctuate as much with the tax credit for first-time homebuyers that expired last year, and is more immune to tighter mortgage-underwriting regulation, McCanless said.

Pulte is poised to benefit from demand for higher-end homes through its Del Webb brand, Joshua Pollard, an analyst with Goldman Sachs Group Inc. in New York, wrote in a July 14 note. Del Webb, a builder of “active-adult” communities targeted at people 55 and older, accounted for about 28 percent of sales in the first quarter, up from 22 percent a year earlier, Dugas said on the company’s April 28 earnings conference call.

JMP’s Smith doesn’t share McCanless’s optimism.

‘Working Through’

“I still think they’re working through the Centex merger. Del Webb is doing well, and Pulte Homes is doing relatively well, but the Centex assets were not particularly well-located,” Smith said. “I just don’t think the Centex assets are that great, and I don’t like what they paid for them.”

Pulte recorded $1.5 billion in goodwill in connection with the Centex acquisition, the builder said in its quarterly report in April. It has written down a majority of that, via impairment charges, the company said. Writedowns occur when market-value for property is less than what a company paid for it, according to McCanless.

Leanne Wandoff, a spokeswoman for Pulte, declined to comment on the options trading and how it relates to the company’s financial results, citing the homebuilder’s quarterly report this week.

The Timing

“It was the timing on it,” said McCanless, referring to the acquisition occurring near the trough of the recession. “There was the belief the tax credit would spur more sales than it did.”

The federal tax credit for homebuyers, which required contracts to be signed by the end of April 2010, pushed sales of new houses that month to the highest level in more than a year. They fell four months later to the lowest in data going back to 1963.

Pulte reported annual revenue of $4.57 billion in 2010, a 12 percent gain from the previous year.

“We’re not predicting that it gets better anytime soon, but we are sizing our business and running our business assuming that the current level of demand stays where it is,” Dugas said in June.

Moody’s Investors Service lowered its outlook for Pulte on April 21 to stable from positive while saying the builder’s greater “size, scale and diversification” since Centex will be a benefit when the industry begins to turn.

Open interest for the January $10 calls has surged more than fourfold in the past three months to 59,768 outstanding contracts through last week. That’s the second-largest open interest out of any of the builder’s 404,400 outstanding options, according to data compiled by Bloomberg.

“It’s a bet that in six months we’re going to have another oscillation in sentiment” becoming more positive, Michael Widner, an analyst at Stifel Nicolaus & Co. in Baltimore, said in a telephone interview. “If you want to be leveraged to the upside potential in housing, you’ll probably get the most bang for your buck on Pulte.”

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