We have written at great length about the resurgence of homebuilding in the United States. Like any other sector, if you go long enough without production, demand catches up with supply. Doomsday scenario forecasters in recent years were saying that the American dream of owning a home is over. Yet, demand has caught up with the lack of supply and the homebuilding sector is on fire.
Based in Washington, D.C., boutique broker-dealer Compass Point specializes in mortgage finance, real estate and real estate investment trusts (REITs), homebuilders and specialty finance. For most firms on Wall St., homebuilding is just another sector they follow. At Compass Point it is the main focus. Today the firm upgraded three names to Buy and raised price targets on three others. Here are the three raised to Buy:
KB Home Inc. (NYSE: KBH) was raised to Buy after an impressive common equity and convertible notes offering. Compass Point does not believe its prior concerns regarding KB Homes liquidity position are warranted. Furthermore, while issues with homebuilding margin still exist, the dramatic rise in fourth-quarter 2012 average selling price (ASP) suggests that KB is successfully executing on its mix shift strategy and selling more expensive homes to move-up buyers and high-quality first-time buyers. The upgrade rating and price target increase reflects belief that KB Home will continue to improve its earnings power and reduce leverage, though the company still has work to do to fully shift its product offering up the price point scale and away from first-time home buyers. KB Home is trading near $18.60, and the Wall St. consensus price target is only $15.
Lennar Corp. (NYSE: LEN) was upgraded to Buy from Neutral at Compass Point, which also raised its target to $49.50. The firm notes it is increasingly bullish on Lennar’s homebuilding prospects, and while it does not believe the company’s newly announced multifamily initiatives will add material value to the stock in the near term, the analyst views management’s efforts on this front as further attempts by the company to diversify the income stream, hedge its housing bets and capitalize on what likely will be a side-by-side housing recovery with multifamily. Compass Point thinks the current stock price represents one of the better buying opportunities in the space, particularly given current high valuation levels. Lennar is trading near $42, compared to a consensus target of $41.
Standard Pacific Corp. (NYSE: SPF) was upgraded to Buy from Neutral, and the price target was raised to $10.25 from $7.25. The firm noted that the past several quarters have provided increased clarity into Standard Pacific’s earnings power, the extent of the housing recovery and the high expectations for growth embedded in current valuation levels. Compass Point stated that the firm operates in markets that have been the primary beneficiaries of the housing rebound in 2012, and it caters to higher average selling prices and buyers that are less affected by tight mortgage credit, rather than lower price-point buyers and first-time home buyers. Standard Pacific is above $8 a share, which is above the Wall St. consensus of $7.23.
Compass Point also raised their price target on Ryland Group Inc. (NYSE: RYL) from $38 to $46.50. The Thomson/First Call estimate is $40. Beazer Homes USA Inc. (NYSE: BZH) was raised from $11 to $15, which is below Beazer’s $19 per share. The Wall St. consensus is $15.63. Compass Point also increased its target on PulteGroup Inc. (NYSE: PHM) from $21 to $27. The consensus target is $20.
One key thing for investors to note here is that Compass Point’s price targets are now at or above almost all the consensus numbers. The firm is truly making a call and saying we are still in the early stages of the homebuilding rebound. This is the kind of call people looking to invest in homebuilding stocks may want to heed.