Analyst: Texas Risk To Home Builders Overblown

Troubles in the Texas oil patch are getting overblown in the market for home building stocks, an analyst said Monday.

"The Texas risk is over-stated," said JMP's Peter L. Martin who upgraded D.R. Horton Inc. DHI, KB Home KBH and Ryland Group Inc. RYL to Outperform, from Market Perform.

Martin maintained an Underperform rating on Hovnanian Enterprises Inc. HOV, citing its 40 percent exposure in Texas and its high level of debt.

The U.S. Commerce Department said recently that U.S. new home sales fell slightly in January but remained near a six-year high. Existing home sales in January fell 4.9 percent from December.

Home builders on average have nearly 20 percent of their business tied to fast-growing Texas, where the tailspin in oil prices has put a drag on the local economy.

But except for a group of small-cap builders with an outsized exposure to the Lone Star State, Martin said the impact on the industry will be slight.

On average, Martin said lower oil prices will be more-than-offset by nationwide employment growth, low interest rates and an increasing rate of household formation.

Martin called D.H. Horton, which does about 17 percent of its business in Texas, "the cheapest large-cap home builder" given its exposure to first-time buyers and relatively low debt.

Martin hung a $31 target on Horton, which changed hands recently at 26.25, up $0.08.

Ryland, which does about 25 percent of its business in Texas, got a $55 target from Martin, who cited the company's 2015 earnings guidance as well as its relatively fast inventory turn-around and its return on equity.

Ryland was changing hands recently at $44.76, up $0.72.

KB Homes, with 32 percent exposure in Texas, was trading recently at $13.59, up $0.14, and got a $17 target from Martin.

KB is oversold "given investor frustration" over the company's performance during the past 12 months. "Once the company proves it can sustain positive earnings growth" its share-price should improve, according to Martin.

The exchange-traded fund iShares Dow Jones US Home Construction ITB is up nearly 4 percent year-to-date, versus less than 1 percent for the S&P 500.