With interest rates and mortgage rates falling to the lowest levels in years, it makes sense that some on Wall Street are looking to the top homebuilders as consumer interest heats up again. With traffic to real estate websites surging, and pent-up demand, especially in the entry-level market, it makes sense to look at the top companies in the sector.
A new SunTrust research report makes the call for going long the housing market in the second half of 2019 on the lower interest rate scenario, and with good reason. With the Federal Reserve expected to cut the federal funds as much as another 50 basis points this year, the analysts feel the additional accommodation, and the possibility of stimulating wage inflation could bridge the cycle out as far as 2021.
SunTrust rates three top homebuilders at Buy, and all make sense for investors looking for companies that can benefit from the sharp drop in interest rates.
This is one of the highest volume builders in the United States and a top pick at SunTrust. D.R. Horton Inc. (NYSE: DHI) is the largest public builder by closings in the country, delivering roughly 52,000 homes in 2018. It is positioned in 79 metropolitan markets in six major regions and develops single-family homes primarily for first-time and move-up buyers.
Approximately 80% of revenue comes from the Southeast, South Central and West regions, all of which continue to see very solid growth. The company also provides mortgage financing and title agency services to homebuyers.
The analysts noted this in the report:
Highest quality, faster growth potential (entry-level exposure), competitively advantaged (market share, can weather cost pressures), and strong free cash flow profile provides optionality. We estimate fiscal year 2019 and fiscal year 2020 EPS of $4.25 and $4.70, both are above the Street. We see upside to estimates from the usage of its $1 billion operating cash flows per year. The company’s priorities are share buybacks, debt reduction and bolt-on mergers and acquisitions.
Shareholders receive a 1.25% dividend. The SunTrust price target for the shares is $56, while the Wall Street consensus target was last seen at $50.69. The shares closed Tuesday’s trading at $47.96 apiece.
This very well-known company potentially could be acquired. KB Home (NYSE: KBH) is one of the largest U.S. homebuilders, with roughly 2% market share. The company builds single-family homes, townhomes and condominiums for first-time, move-up and active adult buyers. It is positioned in roughly 40 markets, with around 70% to 75% of revenues attributable to the West and Central regions. It also provides mortgage services through a joint venture with Nationstar.
Founded in 1957, and the first homebuilder listed on the New York Stock Exchange, the company has built nearly 600,000 homes for families from coast to coast. Distinguished by its personalized homebuilding approach, KB Home lets each buyer choose their lot location, floor plan, décor choices, design features and other special touches that matter most to them.
Shareholders receive a 1.37% dividend. SunTrust has a $35 price target, while the posted consensus target is $28.75. The stock traded most recently at $27.20 a share.
This is another top company with a wide product portfolio. PulteGroup Inc. (NYSE: PHM) is another of the largest public homebuilders in the nation, delivering over 23,000 homes in 2018. The company is positioned in approximately 50 markets in 26 states, targeting the first-time, move-up and active adult buyer groups.
PulteGroup primarily builds single-family detached homes, although it also constructs townhouses, condominiums and duplexes. The company owns a captive financial services business that provides mortgage financing, title, insurance and closing services.
Investors receive a 1.40% dividend. The $38 SunTrust price objective compares with the $32.10 consensus price target and the most recent close at $32.25.
These three stocks have solid upside to their respective targets. With the mortgage interest levels set for taxpayers on home loans up to $750,000, the great majority of the homes sold by these companies will be eligible for the deduction. In addition, if mortgage rates continue to trend lower this fall, sales should continue to move higher, possibly much higher.