Compass Point Downgrades Five Home Builders (PHM) (BZH) (DHI) (KBH) (HOV)

Compass Point is downgrading five home builders Tuesday, saying 2013 earnings become relevant.

The firm downgraded PulteGroup, Inc. (NYSE: PHM) from Buy to Neutral and downgraded Beazer Homes USA (NYSE: BZH), D.R. Horton (NYSE: DHI), KB Home (NYSE: KBH) and Hovnanian Enterprises (NYSE: HOV) to Sell from Neutral.

Today's action follow last months downgrades of downgraded Lennar (NYSE: LEN), Ryland Group (NYSE; RYL), and Toll Brothers (NYSE: TOL) to Neutral from Buy.

Analyst at Compass Point comments, "We are now shifting away from historical price/book multiples as a basis for our valuations and towards a risk-adjusted return methodology that weighs the ROEs implied in our updated 2013 EPS estimates for
all nine home builders under coverage against ROIs in the range of 7% - 15%."

The firm's new 2012 and 2013 EPS estimates are based on incrementally improving home builder profit margins to 18% in 2013 from 14% in 2011 and G&A expense margins to 13% in 2013 from 16% in 2011, as well as approximately 17% average closings growth in both years for the sector.

Based on these assumptions, the firm sees singe digit downside from current equity levels among Neutral rated builders and 12-25% downside among our Sell rated builders.

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