How To Play The Coming New Home Sales Surge

On August 12, UBS Global Research analyst Susan Maklari published a research report focused on drivers for U.S. new home sales, as well as updating homebuilder ratings and price targets.

Over the next 18 to 24 months, she sees moderating home price appreciation and an increased builder focus on first time homebuyers (Millennials), spurring higher volumes of new home sales.

The new UBS builder price targets below, are based upon a 50/50 blend of 2017 estimated P/E and P/BV (book value), per share.

UBS - Home Sales Forecast

Maklari is forecasting a surge in new home sales growth of 15 to 20 percent through 2017, a strong tailwind for builders which are well positioned.

UBS - Overall Business Evaluation

Luxury homebuilder Toll Brothers Inc TOL was an exception to the first-time buyer thesis, with UBS upgrading the stock from Neutral to Buy, based on "business acumen."

UBS significantly boosted its Toll Brothers target price from $35 to $48 per share, which represents a potential 24 percent return based on the previous close of $38.81 per share.

Maklari noted increased exposure to higher margin California markets, the 2014 Shapell acquisition, and acceleration of Toll's New York - City Living deliveries, as catalysts.

Conversely, Meritage Homes Corp MTH was downgraded from Neutral to Sell, mainly due to a "lack of earnings visibility."

While UBS increased its Meritage target price from $39 to $40 per share, this still represents a potential 8 percent downside from the previous close of $43.28 per share.

Notably, the UBS estimated 2017 EPS of $4.25 per share, is below the $4.66 per share consensus estimate.

UBS Homebuilders - Risk/Return

There are four additional builders under UBS coverage with a Buy rating:

D.R. Horton, Inc. DHI Upgraded from Neutral to Buy, PT boosted from $26 to $38.

The firm's new target price represents a potential 29 percent return vs the prior close of $29.38 per share.

UBS believes, "D.R. Horton is uniquely positioned to capitalize on improving entry level demand given its acumen in constructing homes for this buyer while maximizing profitability."

PulteGroup, Inc. PHM Maintain Buy, Raise PT from $24 to $28 (Highest Total Return).

The new PHM target price represents a potential 36 percent price return vs the prior close of $20.55 per share. Pulte also pays a dividend yield of 1.5 percent.

UBS noted Pulte is well positioned to take advantage of the future trends, due to: an active adult and entry-level focused Centex brand, more disciplined growth and efficient operations.

Beazer Homes USA, Inc. BZH Maintain Buy, Reduce PT from $28 to $23.

The new Beazer target price represents a potential 35 percent upside vs the prior close of $17.04 per share.

UBS noted that the Beazer turn-around plan is on-track, and the company generates ~60 percent of sales from entry-level buyers.
Ryland Group Inc RYL Maintain Buy, Raise PT from $55 to $56.

The firm's new target price represents a potential 26 percent upside vs the prior close of $44.49 per share.

UBS, additionally, noted that Ryland is well positioned geographically from its previous acquisitions, and believes that "conservative management" will be able to guide the company through its acquisition of California-focused Standard Pacific Corp. SPF.