Analyst Downgrades Homebuilders On Macro, Cycle Concerns

Homebuilders Lennar Corporation LEN and KB Home KBH have seen their share prices go up, likely because of low interest rates, but there are macroeconomic headwinds looming and concerns about high housing inventory that led Raymond James to downgrade both stocks.

The Analyst

Raymond James analyst Buck Horne downgraded Lennar from Outperform to Market Perform and lowered the rating on KB Homes from Market Perform to Underperform.

The Thesis

Horne said there were three main reasons for new concerns about the homebuilders.

High Valuations, Dropping Earnings Estimates

Stocks in the sector may be overpriced, Horne said.

“We are concerned that the Street may be picking up anecdotes around modest upticks in April/May new order growth thanks to lower mortgage rates -- but is not focused enough on the extended and elevated promotions/ incentives needed this spring to boost absorption,” said Horne.

The Economy

Horne sees numerous indications that investors are concerned about a recession “somewhere on the visible horizon,” also noting that a majority of CFOs anticipate recession before 2021.

“Most relevant for our renewed caution, though, is that the homebuilding sector is no longer priced for a potential late-cycle shift, and if the yield curve is to be believed - there could be more cyclical risks ahead,” said Horne.

High Inventory

Raymond James’ latest analysis of housing stats shows high inventory in the biggest markets, along with slowing web traffic per property, and less price appreciation. There’s particular concern about weaker demand in California and higher inventory both in California and in the country’s two largest homebuilding markets, Dallas and Houston.

Price Action

Lennar shares were down 1% to $52.48, while KB Homes stock was off 2.42% to $25.58 on Tuesday afternoon. Both Lennar and KBH report earnings next week.

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