From GS this morning:
March 19, 2012
Americas: Building - Homebuilders
Equity Research Housing views from the ground: Expect positive tone from the next 11 housing data points
Introducing “Housing views from the ground”
Valuation is not stretched if data improves
We introduce “Housing views from the ground”, which aims to provide investors with market color ahead of major monthly housing statistics. With our coverage up 40% YTD we use our inaugural report to address the most pressing questions we are fielding from investors. Separately, we use unconventional, timelier data to estimate housing starts (railroad lumber volumes), existing home sales (using mortgage apps), and Case Shiller home prices (asking prices).
The homebuilders trade at 1.8X book vs. the long term average of 1.6X. In our view, they should trade at a premium given that book is near trough. If the housing data set keeps improving, we believe investors are likely to shift more toward normalized valuation, which points to book valuations above the long term average. We raise our homebuilder price targets by 35% (on average) as we shift our methodology from distressed book to book plus deferred tax assets.
RELATED RESEARCH
“Survey reflects a healing housing market; however tough to ignore valuation”, 01/25/2012
“Housing is healing but not fast enough to ignore valuation”, 01/10/2012
“Commentary: Where investors stand on housing =positive”, 01/19/2012
Our expectations for upcoming macro data vs. Consensus expectations:
Our top ideas across the builders
February existing home sales (SAAR): +5% m/m (vs.
Street :+0.7% m/m)
February housing starts (SAAR): +1% m/m (vs. Street: +0.1% m/m)
Sales strength: not just the weather
Our favorite names across the homebuilders are MDC Holdings (MDC), PulteGroup (PHM) and Toll Brothers (TOL). MDC is an underappreciated turnaround story with a net cash balance sheet and a 3.9% dividend yield. Pulte is also a turnaround that has already shown some of the operating leverage of it lower cost structure, but still trades at a discount given its 2009-10 missteps. Toll is a long term market share gainer in the higher-barrier-to-entry luxury home market.
The home purchase decision is based on jobs, home price expectations and confidence, which are improving. Weather is a much smaller factor and should not pull forward demand from the spring. In fact, our positive channel checks for February/early March have been similar to better in markets unaffected by winter weather such as Florida and California vs. our Northeast channel checks. Overall, we expect the next set of housing data points to be positively tilted.
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