- Wells Fargo analyst Deepa Raghavan changed homebuilder estimates, ratings, and price targets.
- According to the analyst, fundamental housing data will continue to deteriorate steadily from here, feeding negative investor sentiment. She seeks to estimate how far stocks can fall based on perceived risk.
- Raghavan notes that proprietary housing market checks in May confirmed the April housing inflection. The slowdown was more noticeable at the value end of the chain and is gradually spreading.
- Given the enormous spike in interest rates YTD, the analyst added, the home market downturn is arriving sooner than many expected.
- The rating modifications are based on a combination of downcycling scenarios study issued by Wells Fargo since March on recession analysis, normalized earnings scenarios, and balance sheet stress tests.
- M.D.C. Holdings, Inc. MDC has been downgraded to Underweight from Equal-Weight with a price target was $27 (a downside of 5%). The analyst lowered 2023 estimates for MDC by 28% vs. prior estimates (worse than peer average).
- Raghavan sees the company as a high-risk perception from the most owned lot position among public peers. A lower pre-pandemic land base indicates relative risks to gross margin sustainability.
- Meritage Homes Corp MTH has been downgraded to Underweight from Equal-Weight with a price target of $65. The analyst also lowered 2023 earnings the most for MTH among spec builders (worse than peer average).
- Raghavan mentions that MTH normalization to pre-covid levels would risk solid advances made since 2020 (EPS rose 3x over 2 years through 2021 and above peers). She added that a lower pre-pandemic land base and slightly higher balance sheet sensitivity also overlay.
- Toll Brothers Inc TOL has been downgraded to Equal-Weight from Overweight and lowered the price target to $48 (an upside of 15%) from $56. The analyst states that BTO luxury is holding strong for now but should follow the general housing market with a lag as the cycle inflects.
- She adds that the gross margin/ ROE sustainability will likely be a show-me for investors in a slowdown, and its affordable luxury product line resilience will be tested for the first time.
- Wells Fargo lowered 2022/2023 earnings across the homebuilder universe. The FY22 EPS is now lower by 12% vs. prior estimates, and FY23 EPS is lower by -21% year-over-year, and operating margins lowered by 360bps (GM -280 bps, SG&A +80bps).
- Raghavan mentions that Wells Fargo is at the low end of the Street for most of the names, and the downward revisions have only now begun.
- Price Action: MDC shares are trading lower by 4.15% at $28.41, MTH lower by 2.30% at $65.28, and TOL lower by 0.07% at $41.55 on the last check Friday.
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