Strong Momentum In Homebuilding Industry: Raymond James' Take On Upgraded Ratings And Increased Price Targets

Raymond James analyst Buck Horne raised the rating on several homebuilding stocks, given his bullish stance on homebuilding industry growth.

Industry metrics: The analyst is upbeat on substantial homebuilders’ YTD stock performance and surprising declines in existing home inventory to just 1.1 million listings (-6% y/y) on the supply deficit of single-family homes relative to demand.

Although mortgage rates are up 7%, the analyst sees buyers willing to accept current rates given the scarcity of move-in ready inventory. 

Also, homebuilders are aiming to gain market share from the re-sale market as existing homeowners are not looking to leave their cheap mortgages. 

Hence, Horne expects existing home inventory to remain challenging this year. 

The analyst expects the homebuilder companies to see strong momentum into H2 FY23, followed by continued strong sales growth through June, paving the way for potential upward EPS revisions.

The analyst notes recent data indicating homebuilders attracting significantly higher-income households into their communities and attracting luxury buyers.

Rating Upgrades: Horne upgraded the rating on Toll Brothers Inc TOL to Strong Buy from Outperform at an increased price target of $100 (from $77).

Also, the analyst raised the rating to Outperform from Market Perform for Lennar Corp LEN at a price target of $150, PulteGroup Inc PHM at a price target of $93, M.D.C. Holdings Inc MDC at a price target of $55 and KB Home KBH at a price target of $61

Raised EPS Estimates: The analyst raised the EPS estimate for DHI to $10.96 (from $10.63 vs. consensus: $10.74) for 2023 and $13.20 (from $12.70 vs. consensus: $11.96) for 2024.

For PHM, the EPS estimate was increased to $9.35 (from $9.00, consensus: $9.53) for 2023 and $10.35 (from $10.00, consensus: $9.33) for 2024. 

For KBH, the EPS estimate was raised to $6.15 (from $5.20, consensus: $6.45) for 2023 and $7.15 (from $6.25, consensus: $7.02) for 2024.

For MDC, the EPS estimate was increased to $3.85 (from $3.70, consensus: $3.60) for 2023 and $4.80 (from $4.65, consensus: $3.88).