Wells Fargo Analyst Sees Opportunity For Homebuilding & Building Product Companies Amid Volatility: The Details

Wells Fargo analyst Sam Reid initiated coverage on several homebuilding and building products stocks.

The analyst said recent volatility in the homebuilding space offers an opportunity. Reid cites that the high rates pose a barrier for resales but offer interesting TAM implications amid low existing home sales (EHS) builders. 

The analyst initiated coverage at an Overweight rating on:

D.R. Horton Inc DHI and Lennar Corp LEN both at a price target of $123.

Masco Corp MAS at a price target of $58.  

PulteGroup Inc PHM & Toll Brothers Inc TOL both at a price target of $80. 

The analyst commenced coverage on Mohawk Industries Inc MHK at an Underweight rating and a price target of $85.

On the other hand, Reid assumed coverage of Ferguson PLC FERG, KB Home KBH, Owens-Corning Inc OC at a Neutral rating. 

Homebuilding

DHI: The analyst sees DHI as the best-positioned among all to survive the near-term rate headwinds through a unique combination of offense and defense mechanism in homebuilding, with a flexible, production-oriented model that can pave the way for additional share gains in FY24. 

The analyst sees EPS of $13.38 (vs. consensus: $13.32) for FY23 and $14.29 (vs. $13.75 street view) for FY24.

LEN: The analyst said the company's 'assembly line' model should drive growth and long-term operating margin. Reid estimates EPS of $13.56 (vs. $13.51 cons.) for FY23 and $14.82 (vs. street view $14.37).

TOL: The analyst notes TOL benefits from an affluent buyer mix and 'virtually' no competition at a comparable scale in luxury space. The analyst sees EPS of $12.05 (vs. street view $11.96) for FY23 and $11.96 (vs. $11.79 cons.) for FY24.

PHM: The analyst sees PHM as a full-package company, with a diversified portfolio offering both scale (3rd-largest U.S. builder) and segmentation (40% first-time + 35% move-up + 25% active adult).

Reid estimates EPS of $11.88 (vs. $11.72 cons.) for FY23 and $12.22 (vs. street view $11.80) for FY24.

Building Products

MAS: The analyst cites MAS' stability amidst a tough macro, given its low ticket & needs-based assortments and channel relationships.

MHK: The analyst said the company has strong brands, geographic mix & global scale but sees a headwind related to EHS-driven demand and soft discretionary big-ticket project demand.

On the other hand, the analyst sees a near-term growth catalyst for FERG but is cautious about KBH given its exposure to higher owned land numbers and still elevated West Coast exposure.

Also, OC's peakish Roofing/Insulation margins against long-term cyclical category dynamics keep the analyst view on a more neutral risk-reward side.