Analyst Calls All Clear for Homebuilders in 2014

Jon C. Ogg

The homebuilding sector has sure seen its waves of booms and busts. Much improvement has been seen since the recovery started nearly five years ago, and now a report from Sterne Agee's Jay McCanless is very positive on several homebuilders. His focus is that inventory checks appear positive ahead of the 2014 spring selling season.

The top pick for the sector remains D.R. Horton Inc. (DHI), but Sterne Agee has other key picks with Buy ratings and big upside targets as well.

McCanless estimates that new home inventories and existing homes for sale both remain relatively low and offer a base for homebuilders' pricing power. Jay McCanless said"

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We estimate approximately 90% of national annual home ownership transactions are existing homes with the rest in new homes. Since the supply of existing homes (approximately 131.0 million existing homes versus a 40-year annual average of 1.3 million housing starts) is substantially larger than new home supplies, we believe turnover and price growth in the existing home market, or the lack thereof, will push the new home market in a similar direction.

Several other key points were brought up as well. Sterne Agee believes that the competitive threat of existing homes for sale remains low for its homebuilding coverage. The firm also sees a reasonable amount of inventory ahead of the season and believes that discounting appears to be limited. Lastly, current incentives are 3% to 5% of the average list price.

D.R. Horton Inc. (DHI) has a Buy rating and is listed as the top pick in the sector at Sterne Agee. The firm's price target is $27, versus a closing price of $21.28. The consensus price target here is $23.47, and the street's highest price target is up at $28.00. Sterne Agee's forward P/E ratio for 2014 is only 13.9, a discount to the broader market.

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PulteGroup Inc. (PHM) is another Buy-rated pick at Sterne Agee. Pulte closed at $19.20 Tuesday, and Sterne Agee's price target is $24.00. The consensus price target is $20.35, and the street's highest price target is $26.00. Pulte's 2014 P/E from Sterne Agee is 16.4.

Ryland Group Inc. (RYL) also has a Buy from Sterne Agee. The builder closed at $41.18, and the Sterne Agee price target is $50.00. The consensus price target is $46.08, and the street-high target is $50.50. Ryland trades at only 13.5 times Sterne Agee's forward earnings.

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