These Pros Love Toll Brothers And KB Home After Touring A Bunch Of Homes

On March 31, MKM Partners published a note after touring new home communities in the San Francisco and Atlanta markets.

MKM toured private builder communities as well, in order to better judge the absorption and pricing power in each market.

In general, MKM's overview of U.S. homebuilders in March was that it was a "good month," but not necessarily "booming."

Atlanta - Northern And Northwestern Suburbs

Ryland Homes (NYSE: RYL) - Neutral, $43 FV vs previous close of $48.91.

• An RYL community had sold ~75 percent of homes at a fast pace, with only 30 remaining. Anecdotally, the sales agent described it as "a once in a lifetime opportunity."
• MKM estimates that Ryland has a ~6.5 percent exposure to the Georgia market.

D.R. Horton (NYSE: DHI) - Neutral, $25 FV vs previous close of $28.01

• DHI was offering a spring sales event at its Atlanta communities, "which the sales associate indicated was typical at this time of year."
• The associate was pleased with the sales pace, but noted that D.R. Horton had multiple communities open for sale in the area, "and the largest competition they had was themselves."
• MKM estimates that DHI has ~4.4 percent exposure to Georgia markets.

MKM expects new home sales in Atlanta are likely to perform better than existing home sales, due to the reduction in investor activity in that market.

San Francisco Bay Area

In general, sales are continuing at a brisk pace with prices being raised in almost every community that was visited by MKM on the tour.

Toll Brothers (NYSE: TOL) - Buy, $44 PT vs previous close of $39.21.

• In one Toll community, the sales were averaging four per month vs a nationwide average of one to two per month, while sales prices had increased by $110,000 since the community opened less than one year ago. Notably, Toll operates in the luxury, or higher end of the market.
• Anecdotally, the pace of construction appeared to be on schedule, indicating no shortage of labor or materials.
• MKM did not indicate the percentage of exposure TOL has to Northern California markets.

KB Home (NYSE: KBH) - Buy, $20 PT vs previous close of $15.66.

• At the KB Home communities visited, there were lots remaining for sale in the $1-1.5 million price range. This confirms MKM's belief that KBH will "continue to maximize the price on prime California properties"
• KB Home has a limited amount of lots remaining in these communities, and MKM expects over time that this will put downward pressure on the average sales price (ASP) in California.
• However, as long as the pace of sales continues at a brisk pace nationally, KBH "operating margins should continue to improve."
• MKM estimates that KB Home has a 12 percent exposure to NoCal markets by community count.

MKM - Bottom Line

Overall, MKM believes homebuilder valuations "have become somewhat stretched at this point."

It believes Toll Brothers and KB Homes offer "the best risk/reward profiles at this stage of the housing cycle," especially looking beyond the spring selling season results.