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Trump And Interest Rates: A 2017 Homebuilder Preview

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Trump And Interest Rates: A 2017 Homebuilder Preview

MKM Partners is cautiously optimistic on the homebuilding sector heading in to the spring selling season.

The brokerage expects homebuilders as possible, but not guaranteed winners, under Donald Trump's presidency, with lower taxes and regulations. At the same time, the sector needs to deal with potential higher rates and an increasing shift to service the lower end of the market.

Investors perceive that homebuilders should benefit from potential lower corporate tax rate due to their high GAAP tax rates. But, the benefit would vary according to the deferred tax assets of each builder.

MKM Analyst's Commentary

Analyst Megan McGrath sees the biggest potential near-term winners in the homebuilding sector from corporate tax reform in NVR, Inc. (NYSE: NVR), D.R. Horton, Inc. (NYSE: DHI), Lennar Corporation (NYSE: LEN) and Toll Brothers Inc (NYSE: TOL).

Meanwhile, the 2017 will be the year when many builders would focus on the lower end/first time buyers. But, higher mortgage rates could play spoilsport on the lowest of the price spectrum. In this scenario, the margin commentary from homebuilders should be key.

Similar to last year, McGrath says margins could be a big theme in 2017 too, as builders deal with changing input costs and mix shifts in land and buyer profiles.

Expectations And Ratings

McGrath sees an average gross margin decline of 40 bps in 2017, after a 70-bps anticipated decline in 2016. The analyst noted that the companies should effectively communicate the potential margin impact to investors.

The analyst has maintained her Buy ratings on Toll Brothers and CalAtlantic Group Inc (NYSE: CAA), as both provide unique product or regional positioning at attractive valuations.

“We are encouraged by the recent spike in consumer confidence, but concerned that there is a large amount of uncertainty out there for the average consumer, which may not be resolved before the spring selling season ends,” McGrath wrote in a note.

Latest Ratings for CAA

DateFirmActionFromTo
Nov 2017Deutsche BankDowngradesBuyHold
Nov 2017MizuhoDowngradesBuyNeutral
Nov 2017UBSMaintainsNeutral

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