Ditching D.R. Horton For This Homebuilding Stock

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  • Taylor Morrison Home Corp TMHC shares are down 4 percent over the past 3 months, while shares of D.R. Horton, Inc. DHI have gained 15 percent during the same period.
  • Deutsche Bank’s Nishu Sood upgraded the rating on Taylor Morrison from Hold to Buy, while reducing the rating on D.R. Horton from Buy to Hold.
  • An ongoing housing recovery and above average growth means there is limited downside to DR Horton’s stock, Sood said, while adding that Taylor Morrison’s valuation does not reflect the recovery in the housing segment.

Analyst Nishu Sood maintained a contrarian bullish stance on the housing and homebuilders segment, adding that the small-cap builders hold a greater relative value than the large-cap builders.

While the housing segment has maintained its momentum, the trend has mainly benefitted large-cap builders such as DR Horton. Sood commented, “…as a result, large-cap builders need time to grow into their valuations. On the other hand, small-cap builders have more attractive return potentials, particularly higher-growth stories such as Taylor Morrison.”

DR Horton shares have been performing extremely well and have appreciated over 43 percent in the past twelve months and over 25 percent year-to-date. Sood commented, “While we continue to expect a strong fundamental trajectory for DR Horton, we think investors may be placing too high a value on the company’s growth profile.”

Deutsche Bank has a $32 price target for DR Horton.

Taylor Morrison Value Not Recognized

In contrast, investors have not recognized Taylor Morrison’s value because of market cap and acquisitions, Sood pointed out. The report added that the discount in valuation of small cap builders is expected to diminish as investor belief in the housing recovery grows.

Sood also mentioned that the consensus estimates do not reflect the impact of the sale of Taylor Morrison’s Canadian business. Neither do they reflect acquisitions of JEH and assets from Orleans. The company’s gross margins are expected to expand in 2H15, while the consensus estimates assume overall 2016 margins to be flattish.

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Posted In: Analyst ColorUpgradesDowngradesAnalyst RatingsDeutsche Bank
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