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As fight with founder rages, data paints a mixed picture at PulteGroup

PulteGroup Inc.founder William Pulte on April 11 ratcheted up his demand for the immediate of Chairman and CEO RichardDugas Jr. with a scathing open letter to the company's board in which he declaredthat his supporting the executive's appointment in 2003 was "perhaps the biggestmistake of my career."

Under Dugas' tenure, Pulte wrote in the letter, PulteGroup madeoverly aggressive land purchases, which led to "significant write-downs andlosses." Pulte claimed that he began to take a look at the company's innerworkings after receiving "all kinds of negative feedback about Richard, hisdecisions, and his leadership."

"Over time, I came to realize that PulteGroup was not performinganywhere near that of its competitors, i.e. [D.R. Horton Inc.], [LennarCorp.], [NVR Inc.],"Pulte said.

While Dugas promised Pulte he would take his suggestions andexpertise under advisement in order to right the ship, "he NEVER did,"Pulte said, arguing that Dugas' lack of homebuilding experience and knowledge "hidesbehind 3 words strung together, 'Value Creation Strategy,'" and ignores creativeapproaches to product and sales, "which is the lifeblood of our company andwhich can be pursued while having a return-focused land investment strategy anda strong, conservative balance sheet."

According to Pulte, PulteGroup's stock has been flat over thelast three years and has been "nearly stagnant" under Dugas' 12 yearsas CEO. Also on Dugas' watch, Pulte said, the company's sales have declined morethan 30%, and the company fell from the No. 1 homebuilder spot to the No. 3 spotand lost a cumulative $530.0 million.

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The company responded to Pulte's attack, showing no sign of backingoff its current plan of sticking withDugas through his previously announced May 2017 retirement.

"We are disappointed that the Pultes continue to attemptto destabilize the company's leadership and derail our successful value creationstrategy through their public statements," the company said in an April 11statement. "Their attacks bear little resemblance to the facts."

The company said that since 2011, it has generated $2.2 billionof pretax income, including $816 million of income in 2015, and has seen its debt-to-capitalratio fall to 30% at the end of 2015 from 60% at the end of 2011. The company alsoreturned $559 million to shareholders through dividends and share repurchases in2015, according to the statement.

SNL data paints a mixed picture of PulteGroup's recent performance.The company's five-year total return of 137.44% topped that of the SNL homebuildersindex, which saw a total return of 95.8%, and its stock price rose 127.6% over thatperiod, better than the homebuilder index's 90.56% rise.

However, PulteGroup saw the number of new homes it sold in 2015fall 0.40% year over year, whereas all other publicly traded homebuilder companieswith market caps over $1 billion saw increased sales, led by CalAtlantic Group Inc., which recorded a 46.03% jump in homessold. D.R. Horton, Lennar and NVR each saw respective gains of 27.83%, 15.44% and12.37% in the number of homes they sold in 2015 over the previous year.

PulteGroup also trailed its peers in terms of new orders, withyear-over-year growth of 8.14% in 2015, compared to 25.82% growth at D.R. Horton,13.98% growth at Lennar, and 13.65% growth at NVR.

PulteGroup's unit backlog at Dec. 31, 2015, was 6,731 homes,which topped NVR's backlog of 6,229 and Lennar's backlog of 6,557 units but trailedD.R. Horton's backlog of 10,665 units.

In an April 4 note, Credit Suisse analysts Michael Dahl, MatthewBouley and Anthony Trainor backed up Pulte's assertion that management's currentstrategy of a "balanced capital allocation" comprising buybacks, dividendsand lower leverage has led to the company's underperformance in terms of both growthand share price.

"We have long shared a view that the current strategy wouldunderperform in a growth environment — one driver of our Underperform rating — butthe catch 22 is that this would have been a better discussion to have several yearsearlier, as any potential shift in strategy now or in '17 could prove even morechallenging if capital allocation were to shift away from buybacks and into moreaggressive growth mode at this later point in the cycle (in our view), especiallywith land prices elevated," the analysts said, warning that Pulte's push forDugas' ouster could lead to a proxy fight ahead of the company's May 4 shareholdersmeeting.