BofA Upgrades Meritage Homes In Bullish Turn On Homebuilders, Downgrades 3 Building Products Names

Bank of America Merrill Lynch upgraded Meritage Homes Corp MTH Monday and downgraded several companies in the building products space due to input cost headwinds and company-specific challenges.

The Analyst

Bank of America analyst John Lovallo II issued the following rating changes and price target revisions:

• Meritage Homes Corp. was upgraded from Neutral to Buy with a price target raised from $57 to $60.
• Fortune Brands Home & Security Inc FBHS was downgraded from Buy to Neutral with a price target lowered from $70 to $62.
• Masco Corp MAS was downgraded from Buy to Neutral with an unchanged $44 price target. 
• Jeld-Wen Holding Inc JELD was downgraded from Buy to Neutral with a price target lowered from $41 to $33.

The Thesis 

• BofA's Meritage thesis stems from the company’s “improving execution, attractive footprint and push into entry-level [housing]," Lovallo said. Meritage is benefiting from the broader homebuilding sector’s positive inflection in demand and profitability, the analyst said. 
• Fortune Brands’ “high-quality product portfolio” is being undercut by promotional activity from competitors and evolving consumer preferences, Lovallo said. BofA projects the company’s growth at slightly below the industry average through 2020, in part due to topline headwinds in cabinets this year.
• Masco is expected to continue facing headwinds similar to Fortune Brands, the analyst said. Margin expansion in the second half of 2018 will be challenged by a negative impact mix from the company’s acquisition of Kichler Lighting, despite significant growth in other products, Lovallo said. Net-net, Lovallo sees the company’s potential upside as limited for now.
• Jeld-Wen can expect to benefit from its window and door products, which are levered to many “key industry themes,” but several company-specific overhangs present a challenge, Lovallo said. The company is in litigation with Steves & Sons and is searching for a CEO, he said. 

Price Action

After jumping at Monday’s open, Meritage shares were trading up 0.45 percent at $44.35 at the time of publication Monday.

Fortune Brands shares were down slightly at $56.07, while Jeld-Wen was down 0.16 percent at $28.66. 

Masco stock was down 1.22 percent at $37.60. 

Related Links:

4 Reasons Why Wedbush Is Bullish On Meritage Homes

JPMorgan Answers Questions On The Homebuilder Sector, Projects 'More Modest' 2018