Market Overview

Cautious Analyst Note from Barclays & New Sales Data Drag Homebuilders Lower

On Monday, Stephen Kim, an analyst at Barclays, issued a research note on the U.S. building products and homebuilding sector.

He concluded it will become increasingly difficult for investors to find value in the sector.

“We believe the homebuilders' already high market shares and decelerating price trends will place a cap on their top-line growth and margin expansion through 2016,” Kim said in his research note. “We remain cautious on homebuilding stocks as a group this year, and believe that outperformance will increasingly depend on stock selection.”

Kim added that, “in general, we believe investors will fare better by limiting incremental investment on the building product names,” but he singled out D.R. Horton (NYSE: DHI), Lennar Corp (NYSE: LEN) and Meritage Homes (NYSE: MTH) as investments that are likely to outperform their peers throughout 2014.

Kim does not favor names such as KB Home (NYSE: KBH), which was downgraded to Underweight from Equal Weight. Toll Brothers (NYSE: TOL) was also downgraded to Underweight from Equal Weight.

New Home Sales Plunge

Investors found no relief from Kim's research note in Monday's new home sales data.

New home sales fell 7.1 percent month-over-month in December, to an annualized pace of 414,000. The consensus estimate called for new home sales to decline 1.9 percent to an annualized rate of 455,000.

Monday's data “is 7.0 percent (±17.5 percent) below the revised November rate of 445,00, but is 4.5 percent (±19.8 percent) above the December 2012 estimate of 396,00,” said the U.S. Census Bureau in a press release. “An estimated 428,000 new homes were sold in 2013. This is 16.4 percent (±4.0 percent) above the 2012 figure of 368,000."

Market Reaction

The SPDR S&P Homebuilders ETF (NYSE: XHB) traded lower by 1.5 percent going in to Monday afternoon's trading session.

USG (NYSE: USG) is the largest holding within the S&P Homebuilders index at 3.69 percent. Shares were trading lower by nearly five percent at $29.20.

D.R. Horton, the second largest index holding at 3.46 percent, was also trading lower going in to the afternoon session. Despite being singled out in the Barclay's research report as a potential out-performer, shares lost 2.2 percent trading at $20.42.

KB Home was one of the sector's worst performers, shedding more than 5 percent trading at $17.07. Shares are down more than 30 percent from its 52 week highs of $25.14.

One of the few positives within the sector is NVR (NYSE: NVR), which announced its fourth quarter results Monday morning. The company reported an EPS of $21.15 per share, above the consensus estimate of $16.31. Revenue of $1.24 billion beat the consensus estimate of $1.13 billion. Shares were trading higher by 4.4 percent at $1,052.99, near its 52 week highs of $1,100.00 set in March 2013.

Earnings Schedule

USG is scheduled to report its first quarter results on Feb. 6. The consensus estimate is for an EPS of $0.09 and revenue of $907.49 million.

DR Horton is expected to report its first quarter results on Tuesday. The consensus estimate is for an EPS of $0.29 and revenue of $1.45 billion.

Toll Brothers is estimated to report its first quarter results around February 20, with no set date yet. There is no current consensus estimate on EPS and revenue.

Lennar is estimated to report its first quarter results around March 20 with no current consensus estimates.

Investors looking to closely monitor earning season can use the earnings calendar on streetinsider.com or earningswhipsers.com

Posted-In: Barclays Barclays Homebuilders D.R. Horton Homebuilders Sector KB Home Lennar Corp meritage homes new home sales New Home Sales December NVR SPRD S&P Homebuilders Stephen Kim Toll Brothers USGNews Economics ETFs Best of Benzinga

 

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