Why 1 Analyst Just Raised Price Targets On These 7 Homebuilders

On Wednesday, Sterne Agee issued a research note, "Keep Buying Homebuilders," updating valuation and price targets for: 

D.R. Horton, Inc. DHI,

Lennar Corporation LEN,

PulteGroup, Inc. PHM,

Meritage Homes Corp MTH,

Ryland Group Inc RYL,

Standard Pacific Corp. SPF and

Tri Pointe Homes Inc TPH.

Big Picture – Strong Performance Vs. Broader Market

A Closer Look – 7 Homebuilders' YTD Performances

Several of these homebuilding stocks have significantly outperformed the two homebuilding ETFs YTD.

Related Link: 2 Homebuilder ETFs Establish New Uptrend

Sterne Agee – Growth Drivers

• "Rising Shelter Demand Could Be a Tailwind for Housing Stocks" – driven by strong household formation during the second half of 2014.
• "Investors Should Have Exposure to Move-Up Buyers" – Sterne Agee believes that the biggest contributor to near term revenues and earnings will be the traditional move-up buyer.
• "Y/Y growth in average backlog prices was generally ahead of our assumptions in the most recent round of earnings reports, which suggests to us that the move-up buyer is the demographic where our builders can maintain or raise prices."

Sterne Agee estimates each of these builders "generate 60 percent or more of revenues from move-up and luxury buyers."

Valuation and Price Target Changes

Sterne Agee shifted valuation assumptions higher in this note because of a belief that affordability and growth in net households increase the potential for earnings and order-growth to surpass previous expectations.

• D.R. Horton: PT raised 21.7 percent to $28 from $23, which is approximately 15.0x unchanged FY15E EPS of $1.96 versus prior approximate 12.0x P/E multiple.
• Lennar: PT raised 15.8 percent to $44 from $38, which is approximately 15.0x unchanged FY15E EPS of $2.81 versus a valuation at the midpoint of 10x to 15x FY15E EPS.
• Meritage Homes: PT raised 26 percent to $53 from $42, which is approximately 15.0x unchanged FY15E EPS of $3.63 versus a P/E multiple of approximate 12.0x previously.
• PulteGroup: PT raised 17.4 percent to $27 from $23. The new price target is approximately 2.0x our FY15E book value per share of $13.69 versus prior approximate 15.0x P/E multiple on unchanged FY15E EPS of $1.45.
• Ryland Group: PT raised 17.8 percent to $53 from $45, which represents a 15.0x FY15E P/E valuation on unchanged FY15E EPS of $3.54.
• Standard Pacific: PT raised 12.5 percent to $9 from $8, which represents a 15.0x P/E valuation on unchanged FY15E EPS of $0.59.
• Tri Pointe Homes: PT raised 20 percent to $18 from $15, which represents a 15.0x P/E valuation on unchanged FY15E EPS of $1.26.

Sterne Agee – Ratings & Summary Chart