Keefe, Bruyette & Woods Raises 4 Homebuilder Price Targets, Plus 1 Outperform Pick

On Wednesday, Keefe, Bruyette & Woods issued a report updating its views on the homebuilding sector, including:

• Lennar Corporation LEN
• D.R. Horton, Inc. DHI
• KB Home KBH
• Meritage Homes Corp MTH

Additionally, KB&W maintained its Market Perform rating on Toll Brothers Inc TOL and $42 PT (previously updated), which was "equivalent to 1.7x forward book value."

Risks to KB&W price targets included "deterioration in sales volumes or home prices, as well as an increase in interest rates that could impact affordability and valuation."

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Lennar – Outperform, $59 PT

The KB&W new price target represents a 17.8 percent upside from prior close of $50.05 per share.

• The new LEN price target was "based upon 2.2x forward book value."
• KB&W noted that the premium valuation versus its peers was due to "strong homebuilding operations, unique land sourcing and potential for value creation through ancillary businesses."
• Additionally, KB&W believes that Lennar's book value may be understated because "legacy land investments and joint ventures were sharply written down during the financial crises."

D.R. Horton – Market Perform, $29 PT

The KB&W new price target represents a 7.9 percent upside from prior close of $26.87 per share.

• The new DHI price target is "equivalent to 1.8x forward book value."
• KB&W noted that DHI's "attractive long-term attributes persist, including its low G&A and healthy balance sheet."
• KB&W feels DHI shares are currently "fairly valued."

KB Home – Market Perform, $16 PT

The KB&W new price target represents a 15 percent upside from prior close of $13.71 per share.

• The new KBH price target is "equivalent to 0.9x forward book value."
• KB&W noted that "a return on equity (ROE) below KBH's cost of equity warrants a discount to book value."

Meritage Homes – Market Perform, $46 PT

The KB&W new price target represents a 6.3 percent upside from prior close of $43.26 per share.

• The new KB&W price target is "equivalent to 1.45x forward book value."
• KB&W believes that a "below historical multiple is warranted given the uncertain outlook in Texas."
• However, KB&W noted this could be offset by the recent improvement in home sales in Phoenix.

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KB&W – Industry Big Picture

KB&W reiterated that 4Q "positive order trends and recent housing data" indicates "a positive inflection point" for homebuilders.

KB&W noted that it estimates "4Q homebuilder orders grew 9.6 percent Y/Y in units for the sector; while recent positive housing data [which] includes existing home sales (ex. investors) up 6.2 percent Y/Y over the last three months through January and pending home sales up 10 percent Y/Y in January."