Log In | Register
NEW YORK — Surprisingly strong sales results from one homebuilder prompted Raymond James analysts to change its ratings on two others in the industry on Thursday.
After Toll Brothers Inc. posted strong sales for its July quarter, analysts Buck Horne and Paul D. Puryear raised their rating on Lennar Corp. to "Outperform" from "Market Perform," and at the same time cut KB Home to "Underperform" from "Market Perform," citing mainly the price of the stocks in question.
The analysts said Toll Brothers' report "added further weight to the growing body of evidence signaling significant recent improvements in the housing market."
While stating that it appears a "broad-based housing recovery is developing," Horne and Puryear said it is a potentially fragile one, in particular because there are still 4.6 million distressed homes that may end up in foreclosure. "For now, these homes appear to be re-entering the market at a trickle, while the backlog grows larger each month," he said. "However, if evidence mounts that this trickle is turning into a flood, sending waves of excess inventory back into the market a double-dip housing bottom is not off the table, in our view."
In that context, they said, investors should be aware that homebuilding stocks are likely to remain volatile and subject to fluctuation based on economic data and government policy. They don't expect any of the nine companies in the industry they cover to show profits through next year.
That said, if the market continues to show signs of recovery, Lennar Corp. stands to benefit because the potential for having to take charges to write down the value of the land it holds wanes.
In such a scenario, Miami-based Lennar would offer investors "one of the best opportunities in the sector" for continued gains, even after the industry stocks rallied in July.
They set a $16 target price for Lennar shares. The stock added 27 cents, or 2 percent, to $13.79 in midday trading.
The analysts also raised their price target by $2 to $26 for the only other homebuilder they rate "Outperform," Ryland Group Inc. Shares of Calabasas, Calif.-based Ryland nevertheless slipped 27 cents, to $23.04.
As for KB Home, Horne and Puryear said their downgrade was based on the price of the stock, which slipped 48 cents, or 2.6 percent, to $17.81.
The stock added 60 percent since closing at a recent low of $11.38 on July 9.
"We continue to believe KB Home is a standout homebuilder led by an innovative management team that has developed a compelling new entry-level product," they wrote. "The 'Open Series' product line has clearly sent a buzz throughout the sector."
However, the analysts said they are concerned the Los Angeles-based builder may not be able to sustain recent sales momentum as competitors come up with rival products, especially after the $8,000 federal first-time buyer tax credit expires, following the recent end of a $10,000 California new home tax credit.
