Market Overview

Homebuilder Pair Trade? Morgan Stanley Likes Lennar, KB Homes...Not So Much


In a report published Tuesday, Morgan Stanley analyst Haendel E. St. Juste said that the housing market seems to be on an upswing, heading into the summer. Both KB Home (NYSE: KBH) Lennar Corporation (NYSE: LEN) reported EPS beats and recorded pricing power “which should support continued margin improvements in 2H15.”

In the report Morgan Stanley noted that a number of positive metrics from both builders indicate robust housing demand. These include:

  • Order growth ahead of expectations: While KB Home reported 33 percent order growth, Lennar recorded 17 percent.
  • Increase in absorption pace: All the builders in Morgan Stanley’s coverage have experienced absorption growth year-to-date.
  • Pricing power: Both KB Home and Lennar indicated pricing power.

KB Home raised its FY15 revenue guidance from $2.8-$3.1B to $2.95-$3.1B, while also upping its margin guidance for 4Q15 from 17-18 percent to more than 18 percent. Lennar raised its FY15 deliveries guidance from 23.5K-24K to 24-24.5K, while maintaining its gross margin target at 24 percent.

Analyst Haendel Juste maintained an Underweight rating on KB Home, while raising the price target from $14 to $15. The EPS estimates for FY15 and FY16 have been raised from $0.86 to $0.90 and from $1.17 to $1.24, respectively, mostly to reflect higher gross margin assumptions.

Morgan Stanley said the Underweight rating was due to:

  1. The company’s high leverage and low margins relative to peers
  2. Expected flat community count in FY16 could limit volume growth
  3. Management's margin goals appear unachievable in the near term

Juste maintained an Overweight rating on Lennar, while raising the price target from $54 to $55. The EPS estimates for FY15 and FY16 have been raised from $3.23 to $3.27 and from $3.73 to $3.82, respectively.

“LEN continues to earn its high multiplethrough its strong operating platform which generated the deliveries and SG&A beats, mid-teens order growth on positive absorption,and outperforming ancillary business lines,” the report added.

Latest Ratings for KBH

Jan 2021Credit SuisseMaintainsOutperform
Jan 2021WedbushUpgradesNeutralOutperform
Dec 2020UBSInitiates Coverage OnNeutral

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