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On Thursday, Seaport Global Securities updated its ratings on several homebuilders, reflecting a shift in their market outlook. Seaport analysts upgraded D.R. Horton (NYSE: DHI), KB Home (NYSE: NYSE:KBH), Lennar Corp. (NYSE: NYSE:LEN), M/I Homes (NYSE: NYSE:MHO), and TRI Pointe Group (NYSE: TPH) to Buy from Neutral. Additionally, Meritage (NYSE:MTH) Homes Corporation (NYSE: MTH), PulteGroup (NYSE: NYSE:PHM), and Taylor Morrison Home (NYSE: TMHC) were lifted to Neutral from Sell. KB Home, currently trading at an attractive P/E ratio of 7.09, appears undervalued according to InvestingPro analysis, with strong fundamentals including a healthy 21.7% gross profit margin.
The sector experienced a significant downturn since Seaport’s sector downgrade on September 24, with homebuilders seeing a 30% drop in absolute terms and a 34% decline relative to the S&P 500. This performance was in line with historical patterns where early cycle sectors underperform. Seaport now sees a positive call for the sector, anticipating that later cycle sectors will face similar downsides but lack the upside potential when market conditions change.
Seaport’s upgrades for DHI, LEN, KBH, MHO, and TPH are based on valuation and operating metrics, suggesting approximately 27% upside for these stocks. This estimate corresponds to a range of 1.1x to 1.9x on Seaport’s fiscal year 2025 projections. The revised ratings for MTH, PHM, and TMHC reflect a strategic sector rotation that takes precedence over fundamental challenges such as high new supply, decreasing housing starts, and margin pressure. KB Home’s financial health score of "GOOD" on InvestingPro supports this positive outlook, with the company maintaining strong liquidity and a moderate debt level.
The upgrades come with an expectation that these companies will outperform given the current market dynamics. Seaport’s analysis indicates that the homebuilding sector is now positioned to capitalize on market inflections, despite the correlated nature of stock returns and return on equity to book value within the highly correlated sector.
In other recent news, KB Home reported its fourth-quarter earnings, with earnings per share (EPS) surpassing expectations due to reduced selling, general, and administrative expenses and a lower share count. However, the company’s gross margin fell slightly short of expectations, standing at 20.9% compared to the anticipated 21.1%. Analysts at Keefe, Bruyette & Woods responded to these results by maintaining a Market Perform rating but lowering the price target from $85 to $76, citing a projected decrease in gross margin and expected home deliveries. Similarly, JPMorgan reduced its price target for KB Home to $74.50 from $82, following a decline in housing revenue guidance for fiscal year 2025.
Seaport Global Securities upgraded KB Home’s stock rating from Sell to Neutral, emphasizing the company’s stable gross margin guidance and strong performance in Western markets. Barclays (LON:BARC), however, lowered its price target to $60 from $85, maintaining an Equalweight rating, and highlighted potential risks to KB Home’s financial model in 2025. In addition to these analyst updates, KB Home announced annual incentive awards for its executives, with significant payouts in both cash and restricted stock. These developments reflect the complex landscape KB Home navigates as it manages market challenges and strives to maintain its competitive position.
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