Housing had a strong 2019, but not all players set a sturdy foundation. One analyst team sees growth for one building company and decay for three others.
- D. R. Horton Inc (NYSE: DHI) to Underperform and cut their target from $52 to $52;
- Fortune Brands Home & Security Inc (NYSE: FBHS) to Sector Perform but maintained a $67 target; and
- Lennar Corporation (NYSE: LEN) to Sector Perform and cut their target from $63 to $62.
The Homebuilder Thesis
Homebuilders rallied strong throughout the year, and investor expectations continue to rise. But the analysts see little upside to the segment and suspects that optimism around D. R. Horton and Lennar are already baked into estimates.
“We expect housing demand and order growth to remain solid in ’20, while pricing should improve modestly,” Dahl wrote in a report. “This has broadly become consensus, however, with investor expectations rising throughout ’19 (builders +50% YTD), leaving less room for upside beats on growth and margins.”
They expect a peak in order growth in the fourth quarter of 2019, with deceleration throughout 2020. Affordability could also become a problem in the back half of next year. Overall, the analysts see little to celebrate in D. R. Horton and Lennar.
“Potentially underappreciated margin pressures from inflation and mix, growing entry-level competition, potential for community gap-outs, and further gyration in interest rates also represent potential headwinds,” they wrote.
The Building Products Thesis
After a 2019 rally in building products, the analysts are selective in the category.
“Lagged benefits of the housing rebound should flow through next year along with more balanced price/cost (ex. tariffs), but current valuations reflect this...” Dahl wrote. “We continue to see international growth and tariffs, as they stand today, as key risks, though investor concerns over a non-res slowdown may be overblown in our view.”
RBC praised IBP for its margin progression but downgraded Fortune Brands as the stock nears its price target.
“We believe that this is now a consensus buy-side long and that investor expectations have potentially become too optimistic on the near-term trajectory of the cabinets business following the antidumping tariffs,” the analysts wrote.
Should Investors Build A Position In KB Home? Analysts Debate Its Foundation After Q3 Report
Analyst Roundup: Should Toll Brothers Investors Build A Position After Q3 Report?
Latest Ratings for IBP
|Dec 2019||Upgrades||Sector Perform||Market Outperform|
|Dec 2019||Initiates Coverage On||Neutral|
|Nov 2019||Initiates Coverage On||Buy|
View More Analyst Ratings for IBP
View the Latest Analyst Ratings
See more from Benzinga
- Goldman Dumps Groupon, Says International Headwinds Threaten Bottom Line
- PG&E Goes Around California Governor In Restructuring Effort
- Susquehanna Nearly Doubles Micron Price Target: 'Industry Dynamics Are Improving'
© 2019 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.