Credit Suisse Shakes Up Recommendations In Housing Sector: It's All About ROEs

• In a report issued Tuesday, Credit Suisse analysts Michael Dahl, Matthew Bouley and Anthony Trainor shared a look into the homebuilding industry.
• The experts explained that, as performance and multiples vary widely across the industry, the report was aimed at identifying “relative opportunities in a tricky post-liftoff environment.”
• Moreover, they explicated that the multiple disparity derived from the big difference between ROEs among companies.

In a recent report, analysts at Credit Suisse looked into homebuilders stocks, where they think the market will continue to see very disparate performance and multiples “as the market differentiates based on expected ROEs (and perceived sustainability/quality of returns).”

Further, the experts believe volatility is also likely to linger (even though valuations now look more attractive), mainly driven by risks and/or uncertainty from three factors:

• 1. The potential for the Fed to increase mortgage rates – this almost always hurts builder stocks.
• 2. “Continued delays and margin headwinds from labor constraints.”
• 3. Deteriorating sales and pricing trends in the all-important Houston market.

In this context, the analysts focused on identifying what they believe are the most robust relative opportunities in the space.

Related Link: Building Something With Homebuilders ETFs

Top Picks

The firm’s top picks now include:

• CalAtlantic Group Inc CAA (Outperform; $47 target price): Upgrading rating from Neutral and boosting the target from $45; the company offer robust returns and “healthy diversified market exposure at a discount valuation.”
• Toll Brothers Inc TOL (Outperform; $40 target price): The stock offers returns above its peers’ average (even after recent estimate reductions), supported by deep land bank and City Living pipeline.
• William Lyon Homes WLH (Outperform; $20 target price): The company is exposed to the top tier market and boasts substantial growth opportunities coupled with a discount valuation.
• WCI Communities Inc WCIC (Outperform; $26 target price): “Long land position in strong FL markets along with earnings boost from tower pads beginning in ’17.”
• New Home Company Inc NWHM (Outperform; $16 target price): The company is still in the early innings of its multi-year growth ramp and offers “improving ROE's as it develops its current long CA land bank and looks to expand into new markets.”

Bottom Of The Barrel

Credit Suisse’s least favorites are:

• PulteGroup, Inc. PHM (Underperform; $16 target price): The firm lowered its target from $18 to reflect lagging growth, low ROE’s and risk to margins.
• NVR, Inc. NVR (Underperform; $1,475 target price): Downgrading rating from Neutral to better reflect a stretched valuation and “lagging market trends.”
• KB Home KBH (Underperform; $12 target price): Downgrading rating from Neutral and reducing price target from $17 to account for relentlessly weak ROE’s (even under cost of capital) and high Texas exposure – both substantial continued headwinds.

Disclosure: Javier Hasse holds no positions in any of the securities mentioned above.