Spring Is Heating Up For Homebuilders; Stocks Poised For Near-Term Upside

Barclays expects homebuilders to beat first-quarter orders, as its AGENT survey for February shows strong early spring demand and suggests upcoming catalysts for the group will likely be positive.

The brokerage said PulteGroup, Inc. (NYSE: PHM), Lennar Corporation (NYSE: LEN) and TRI Pointe Group Inc (NYSE: TPH) should benefit from these positive trends.

Better-Than-Expected Demand

“We still see modest further near-term upside as builders are likely to report 1Q order beats (Barclays' 1Q order growth est. +13 percent vs. consensus +9 percent), against a backdrop of current sentiment remaining somewhat negative,” analyst Michael Dahl wrote in a note.

The survey also showed that the Buyer Traffic Index increased to 67 in February, up 5 points month-over-month, indicating traffic trends were better than agents expected.

The analyst said agents attributed strong traffic to incremental buyer urgency on expectations of higher future mortgage rates and home prices. In addition, lack of inventory and improved consumer confidence should position new construction to outperform the existing market.

Meanwhile, Dahl said builder checks point to minimal impacts on demand from mortgage rates, which had increased by 85 bps in two months.

Ratings, Price Targets

Against this backdrop, Dahl remains Overweight on PulteGroup, Lennar and TRI Pointe and maintains its Equal-Weight rating on D.R. Horton, Inc. (NYSE: DHI) and Toll Brothers Inc (NYSE: TOL). Also, Dahl reiterated his Underweight rating on KB Home (NYSE: KBH).

Further, the analyst raised the price targets of PulteGroup, Lennar, D.R. Horton, K.B. Home and Toll Brothers to $24/$56/$34/$16/$37 from $23/$51/$30/$15/$34.

“We also see DHI as well positioned to capture incremental demand, and raise our PT to $34 from $30, but remain Equal Weight on valuation,” Dahl added.

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