KeyBanc Offers Pair Trade: Upgrades Pulte, Downgrades Lennar

On Tuesday, Kenneth Zener, analyst at KeyBanc, laid out a homebuilder pair trade, upgrading PulteGroup PHM from Hold to Buy with a $26 price target, and downgrading Lennar LEN from Buy to Hold with the $41 price target being removed. Zener remains cautious on the entire homebuilding sector, but Pulte is an “efficiency story” with an “attractive valuations that offers the defensive characteristics,” which Zener prefers at this point in the cycle. Pulte's earnings and cash flow is “more defensive, given that it is driven largely through cost efficiency rather than a growing community count,” says the analyst. As home price gains slow, Pulte's emphasis on “profitability over volume” will be favored by investors, says Zener. Zener's downgrade on Lennar is a valuation based call and “still appreciates the Co.'s differentiated capital deployment” into accretive land deals. “PHM currently trades at 1.78x its trailing book value vs. its peers' median of 1.96x. LEN currently trades at 2.38x its trailing book value, above its peers' 1.96x median historic range (1.0-2.5x), says Zener. Shares of Pulte are up 0.8 percent to $20.98 while shares of Lennar are down 0.1 percent to $43.78.