Raymond James Doubles Down on Housing Stocks, Upgrades Pulte (PHM), D.R. Horton (DRH) and Toll Brothers (TOL)
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Rating Summary:
20 Buy, 11 Hold, 2 Sell
Rating Trend: Down
Today's Overall Ratings:
Up: 17 | Down: 14 | New: 17
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Raymond James’ analyst Buck Horne upgraded shares of PulteGroup (NYSE: PHM) to "Strong Buy" from "Overweight" as well as D.R. Horton (NYSE: DHI) and Toll Brothers (NYSE: TOL) to "Outperform" from "Market Perform".
Horne takes note of the continuing strength and sustainability of new home demand as the housing market recovers from the coronavirus pandemic. Raymond James has been bullish on the housing sector since the start of this year. This stance has been further reiterated in May by the post-lockdown rebound in demand.
“In this remarkable moment for single-family housing, we simply think well-capitalized single-family homebuilders across all price points, buyer segments, and most geographies will continue to outperform, as earnings growth accelerates and more investors come around to assigning "early cycle" multiples to the group,” Horne said in today’s note.
Horne uses 3 recent data points to underpin the thesis of a faster-than-expected recovery in the sector.
1. The NAHB Housing Market Index just achieved a new record high in October (scoring 85 on an index where anything above 50 indicates an improving market);
2. Inventories of re-sale homes listed for sale reported by the NAR hit new record lows in September;
3. September building permits for single-family surged +24% y/y to 1.1 million annualized units, the highest run-rate since 2007.
Moreover, he believes that consensus estimates are still chasing numbers higher.
“We are increasingly of the view that consensus earnings estimates are still likely behind the curve, as the potential upside of these recent industry wide price increases have yet to flow through income statements or be reflected in any 2021 guidance metrics,” Horne wrote.
As a result, the analyst advises using a recent pullback in the sector to “better align our homebuilding ratings with our overall bullishness on U.S. single-family housing and the likelihood of a durable new housing cycle.”
“We think there is a compelling argument that current sector valuations are still not reflecting the earnings growth potential as homebuilders begin to ramp single-family housing production back towards (and eventually in excess of) historical long-term averages.”
Horne raised PHM's stock price target to $60.00 per share from prior $48.00. DHI and TOL have price targets of $85.00 and $55.00 respectively.
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