Morgan Stanley starts homebuilders with cautious view, Toll Brothers only Buy

Investing.com -- Morgan Stanley began coverage of U.S. homebuilders in a new note to clients this week, with a cautious industry view, saying the companies are better businesses than in the past but face affordability and margin pressure.

The bank started Toll Brothers at Overweight with a $159 price target, its only positive rating. It initiated Lennar, NVR and KB Home at Underweight, and D.R. Horton and PulteGroup at Equal Weight.

Analyst Adam Kramer said builders have gained market share, cut debt and moved to land-light strategies, improving cash flow and buybacks.

However, elevated inventory, falling median new home prices and the year's toughest affordability conditions are constraining demand.

Morgan Stanley models roughly flat closings and average prices in 2027, with about 50 basis points of gross margin deterioration. Its 2027 and 2028 earnings estimates sit about 9% below consensus for all six builders, despite substantial cuts to Street forecasts already.

Toll Brothers offers "a re-rating opportunity without requiring a sharp earnings recovery," Kramer wrote. He said its affluent buyers are less sensitive to mortgage rates, while the stock trades at about 10 times forward earnings, the lowest in the group and a 26% discount to peers.

On Lennar, Kramer said the land-light transition needs to deliver better earnings. He sees downside at NVR even applying a quality premium, and said KB Home's discount to book value does not offset its weak growth outlook.

The analyst also flagged the risk that the stocks recover before earnings do.

Original Article

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