With Synergies Realized, Raymond James Starts CalAtlantic At Outperform

Although CalAtlantic Group Inc CAA reported robust 1Q16 results, the stock is trading at a 20-25 percent discount to its larger cap peers.

Raymond James’ Buck Horne upgraded the rating on the company from Market Perform to Outperform, with a price target of $39.

Synergies Realized

Horne believes the 1Q16 results “demonstrated that the merger integration is progressing better than expected.”

The analyst also pointed out that CalAtlantic’s metrics on capital returns, growth and land quality were similar or better than that of its larger cap peers.

“We believe the successful integration of Ryland and Standard Pacific now lifts an important cloud of uncertainty,” Horne stated.

The 1Q16 results provided several new catalysts, such as “1) a stabilizing absorption rate with strong pricing power; 2) the dissipation of merger-related expenses and concerns that integration would affect sales operations; and 3) merger synergies that are coming in better than expected, with an expected $80 million run rate achievable by 3Q16,” according to the Raymond James report.

1Q Results

CalAtlantic reported its adjusted EPS in-line with expectations, although it was negatively impacted by $17.5 million in one-time, merger-related and purchase accounting charges.

The merger related costs came in marginally below expectations, and Horne noted “the business cultures appear to be meshing well while achieving impressive synergies.”

The pro forma absorption per community came in roughly flat year on year, which the analyst believes is an achievement, given the complex integration.