Home Run To Homewrecker - Analyst Cautious On Homebuilders, Downgrades Key Players

Seaport analyst Kenneth Zener downgraded several homebuilding stocks following a weak outlook for the builder’s sector for FY24.

The analyst says if recession fears ease further, he expects fading rallies into affirmative FY24 sector guidance, ‘as expected tailwinds may become headwinds, and/or an Early to Late sector rotation unfolds.’

The analyst projects builder margins to be bottoming broadly on the easing of past incentives, partly offset by higher input cost and a rising cash-cost divergence among gross margins. 

Zener projects higher-turn builders to fare best supported by cash-flow, and an ability to guide demand upward.

The analyst downgraded the homebuilder outlook, as past Fed cut rating cycles pose a ‘narrowing risk to return outlook is likely near-term.’

The analyst writes that CPI/PPI are trending lower on declining cost inputs, with deflation in China/Europe, but sees stickier domestic service inflation/labor as less certain factors. 

Consequently, the analyst downgraded D.R. Horton Inc DHI, Meritage Homes Corp MTH, Taylor Morrison Home Corp TMHC, and Toll Brothers Inc TOL to Neutral (from Buy) and dropped coverage of M.D.C. Holdings Inc MDC due to its pending acquisition by Sekisui House.

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