Buy The Dip In These Homebuilder-Related Stocks, Wedbush Says

Homebuilding stocks were mostly higher Tuesday after Wedbush turned incrementally bullish on three names, despite year-to-date declines: Beacon Roofing Supply, Inc. BECN, Beazer Homes USA, Inc. BZH and LGI Homes Inc LGIH.

The Analyst

Wedbush's Jay McCanless made the following rating and price target changes:

Beacon Roofing Supply upgraded from Neutral to Outperform with a price target boosted from $52 to $70.

Beazer Homes upgraded from Neutral to Outperform with an unchanged $22 price target.

LGI Homes upgraded from Neutral to Outperform with an unchanged $73 price target.

Beacon Roofing Supply: Valuation Call

Beacon Roofing Supply maintained its full fiscal year 2018 revenue guidance of $6.6 to $6.9 billion and boosted its adjusted EBITDA guidance from $560 million to $600 million, McCanless said in the upgrade note. (See the analyst's track record here.)

Beacon may have had troubles with passing on price increases to consumers, but based on the commentary from the company's recent conference call, this is not a concern, McCanless said. The company anticipates an improvement in pricing power given rising raw material prices and higher customer demand.

Beacon Roofing Supply's stock should trade at a 10x EV/EBITDA multiple on the analyst's estimate of $569.9 million, or $70 per share. The valuation is in-line with the company's peers — which trade in a range of 7x to 11x — and is now warranted given an improved outlook, tax savings and SG&A synergy savings starting in fiscal 2019, according to Wedbush. 

Related Link: Buckingham Upgrades KB Home After 12% Price Drop

Beazer Homes: Rising Demand

Beazer Homes' stock has fallen around 17 percent since the start of 2018 and is now trading at 0.7x the estimated book value of $18.77, which is a discount to the group average of 1.4x, McCanless said. The stock is undervalued in the analyst's view, especially when Beazer is likely to hit its 2018 revenue target of $2 billion and come in just below its adjusted EBITDA margin target of 10 percent.

Beazer Homes' move to redeem its $96.4 million outstanding notes at the end of the fiscal 2018 represents another growth catalyst, the analyst said. The continued balance sheet improvement is an "overlooked facet of the story" and is one of the main reasons why the company can boost its land spending and expand into new product segments like gatherings, McCanless said. 

LGI Homes: Overdone Sell-Off

LGI Homes' stock has fallen nearly 20 percent over the past month, which may not be fully justified, McCanless said.

The analyst gave reasons why he said the sell-off is overdone:

January's unit closing growth was "well ahead" of expectations.

Besides a move higher in the 30-year mortgage rate, there aren't any notable headwinds that impact the company's demand.

The company operates in the "sweet spot" of affordable products for entry-level buyers and downsizing boomers.