Pali Sees Large Benefit to Homebuilders if Obama's Tax Cut Plan is Passed (CTX, DHI, TOL, more)

Pali Research is out with a research note today considering the impacts that a significant Obama tax cut would have on homebuilding stocks.

The report follows news last night that "Obama's incoming administration floated an initial feeler for potentially significant tax cuts for both individuals and businesses." One part of the business proposal would extend the look back period for tax loss recapture from 2 years to 5 years. Pali believes that if this proposal was passed it would have a large benefit on homebuilders given an increase in incremental cash flows.

At the same time, the firm notes that these benefits will not be equal among homebuilders, as certain companies within the sector have pared their balance sheets more aggressively than others. To this point, Pali believes that the homebuilders that have continued aiming at improving their balance sheets will be able to "recapture significantly more cash than those that either have taken fewer charges or remained more profitable during the downturn."

The firm believes the following companies would benefit the most if such a proposal was passed: Centex (NYSE: CTX), Pulte Homes (NYSE: PHM), D.R. Horton (NYSE: DHI), Lennar (NYSE: LEN) and KB Home (NYSE: KBH). Out of the above stocks, Pali said it would be a buyer of Centex, DR Horton, KB Home and Lennar. In contrast, Pali said Toll Brothers (NYSE: TOL), Ryland (NYSE: RYL) and NVR Inc. (NYSE: NVR) would probably not see any benefit from such a plan. The firm said it would be a seller of Toll.

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