Expected Upside for Homebuilders and Home Improvement Companies (NVR, TOL, PHM, HOV, DHI, BZH, HD, LOW)

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Our look at stock target prices focuses on homebuilders and home improvement stores today. It is not news that U.S. homebuilders have had a very tough few years. In the past five years, only one of the six builders we are looking at today has managed a share price gain. The companies began to falter in 2007 and the smallest five-year slide is more than 40%. That may be a new definition of awful.

Worse, there is not much expectation that the market will turn around, at least until 2013. More foreclosed homes coming on the market will continue to depress prices, and until inventories of unsold homes are cleared, there simply cannot be a significant recovery. The homebuilders we are looking at include NVR (NYSE: NVR), Toll Brothers (NYSE: TOL), PulteGroup (NYSE: PHM), Hovnanian Enterprises (NYSE: HOV), D.R. Horton (NYSE: DHI) and Beazer Homes USA (NYSE: BZH).

Home improvement stores have also had to struggle over the past several years. Shares of Home Depot (NYSE: HD) and Lowe’s Companies (NYSE: LOW) are both lower today than they were five years ago.

Share prices were pegged at about noon today, and all data comes from Yahoo! Finance.

NVR has a median target price of $728.00 from four brokers. Shares are trading today at $620.99, for an implied gain of $107.01, or 14.7%. NVR’s forward P/E is 17.6 and the company does not pay a dividend. The stock’s 52-week trading range is $554.71 to $804.31, and at today’s price that is about 12% above its 52-week low and 23% below the 52-week high. NVR’s share price has risen about 12% since October 2006, and of all the homebuilders, it is the only one that can point to a gain over that period. The company’s consensus EPS estimate for 2011 has dropped from $28.02 to $26.45. There might be an opportunity here, but it is a pretty slim one.

Toll Brothers has a median target price of $21.50 from 14 brokers. Shares are trading today at $15.29, for an implied gain of $6.21, or 28.9%. Its forward P/E is 49.35 and the company does not pay a dividend. The stock’s 52-week trading range is $13.16 to $22.42, and at today’s price that is about 16% above its 52-week low and 32% below the 52-week high. Toll Brothers is expected to post EPS of $0.20 for its 2011 fiscal year ending this month — and that is up from an earlier EPS estimate of just $0.02. The company’s position at the luxury end of the market has been something of a prop to the share price, but the U.S. economy is not minting many new millionaires right now.

PulteGroup has a median target price of $6.50 from 15 brokers. Shares are trading today at $4.14, for an implied gain of $2.36, or 36.3%. PulteGroup’s forward P/E is 32 and the company does not pay a dividend. The stock’s 52-week trading range is $3.29 to $8.69, and at today’s price that is about 26% above its 52-week low and 52% below the 52-week high. PulteGroup was one of the 10 worst performing stocks in the recently completed quarter, losing 45% of its value. There is nothing about the homebuilding industry or PulteGroup’s recent performance that justifies the forward P/E ratio of 32. Hope is not a strategy.

Hovnanian Enterprises has a median target price of $1.38 from eight brokers. Shares are trading today at $1.20, for an implied gain of $0.18, or 13%. Hovnanian’s forward P/E is negative and the company does not pay a dividend. The stock’s 52-week trading range is $0.89 to $5.00, and at today’s price that is about 35% above its 52-week low and 76% below the 52-week high. Hovnanian is asking debt holders to exchange old notes for new ones carrying a lower interest rate and a longer term. The offer is scheduled to end next week. The company’s corporate debt rating is CC, just two notches above default. Debt holders are unlikely to ride to the company’s rescue.

D.R. Horton has a median target price of $13.00 from 14 brokers. Shares are trading today at $9.62, for an implied gain of $3.38, or 26%. Horton’s forward P/E is 19.3 and the company pays a dividend yield of 1.5%. The stock’s 52-week trading range is $8.03 to $13.50, and at today’s price that is about 59% above its 52-week low and 29% below the 52-week high. Horton is expected to post EPS for the quarter just ended of $0.14, and full-year EPS of $0.20 for the year ended in September. The consensus estimate for 2012 full-year EPS is $0.50. If the market is getting weaker, as many believe, the company has exactly no chance of meeting that 2012 number.

Beazer Homes USA has a median target price of $3.00 from seven brokers. Shares are trading today at $1.81, for an implied gain of $1.19, or 39.7%. Its forward P/E is negative and the company does not pay a dividend. The stock’s 52-week trading range is $1.35 to $6.23, and at today’s price that is about 12% above its 52-week low and 81% below the 52-week high. Beazer’s biggest trouble is that it is a builder of entry-level homes, the sector that is hardest hit by the number of foreclosed properties coming on the market. One thing that could help Beazer a little is that home owners have begun taking their houses off the market because they are unwilling to sell for the current low prices. Inventory is still high, but it was lower in September than in August.

Home Depot has a median target price of $40.00 from 22 brokers. Shares are trading today at $34.97, for an implied gain of $5.03, or 12.6%. Home Depot’s forward P/E is 13.14 and the company pays a dividend yield of 2.9%. The stock’s 52-week trading range is $28.13 to $39.38, and at today’s price that is about 24% above its 52-week low and 11% below the 52-week high. Research firm BuildFax reports thats home remodeling projects increased by 29% in August compared with August 2010. The firm attributes the increase to refinancing of existing homes at current low interest rates. With the peak remodeling season behind us for another year, this growth could begin to slow down.

Lowe’s Companies has a median target price of $23.00 from 20 brokers. Shares are trading today at $21.09, for an implied gain of $1.91, or 8.3%. Its forward P/E is 11.93 and the company pays a dividend yield of 2.7%. The stock’s 52-week trading range is $18.07 to $27.45, and at today’s price that is about 17% above its 52-week low and 23% below the 52-week high. Lowe’s announced this morning that it was closing another 20 stores across the U.S. and expects to take a charge of $0.17 to $0.20 against second-quarter EPS. About 1,950 employees will lose their jobs. Lowe’s performance has been weaker than Home Depot’s for a couple of years now, and this year the share price is about flat, compared with Home Depot’s share price gain of 15%.

Paul Ausick

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