www.jpmorganmarkets.comNorth America Equity Research11 September 2019HomebuildingSector Update: A Little More Left in the Tank, But Watch Risk/Reward; Upgrading PHM, CCS, MTH, Downgrading NVR, LGIHHomebuilders & Building ProductsMichael Rehaut, CFA AC(1-212) 622-6696michael.rehaut@jpmorgan.comBloomberg JPMA REHAUT Elad Hillman(1-212) 622-6435elad.hillman@jpmchase.comMaggie Wellborn(1-212) 622-5909maggie.wellborn@jpmchase.comJ.P. Morgan Securities LLCSee page 48 for analyst certification and important disclosures.J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.Table 1: J.P. Morgan Coverage UniverseHomebuildersTickerRatingLarger-CapD.R. HortonDHINLennarLENOWNVR, Inc.NVRUWPulteGroupPHMOWToll BrothersTOLUWSmaller-CapKB HomeKBHNMDC HoldingsMDCNMeritage HomesMTHNTaylor MorrisonTMHCOWHigher Growth Smaller CapsCentury CommunitiesCCSOWGreen Brick PartnersGRBKNLGI HomesLGIHNWilliam Lyon HomesWLHOWSource: J.P. Morgan. As we look towards the balance of 2019 and into 2020, we provide the following updated thoughts on the sector as well as refresh our portfolio of ratings. Overall, despite our universe’s impressive 44% rally YTD, effectively reversing last year’s decline (ex-higher growth small-caps; S&P: +19%) – driven by a rebound in several fundamental metrics and a sharp decline in interest rates – we believe the homebuilding stocks still contain some modest remaining upside potential as we anticipate further improvement across most industry and company data points and establish our Dec. 2020 price targets. At the same time, however, we point to a fairly dynamic risk/reward backdrop for the stocks, evidenced by the volatility over the last 18 months, that requires a disciplined approach to the group, in our view, as we believe the stocks remain vulnerable to changes in rates and investors’ views on the cycle. Returning to our current fundamental outlook, we expect housing starts to turn positive YOY and new home sales’ YOY growth to accelerate for the balance of 2019 and early 2020, driven by a combination of the recent sharp decline in interest rates, mostly positive coincident and leading indicators as tracked by our Housing Forecastreport (also published today) and significantly easier year-ago comps. Moreover, our homebuilders’ order growth should also continue to improve in 2H19, resulting in a more stable margin outlook and low double-digit EPS growth in 2020. Lastly, trading at roughly 10.5x and 9.5x our 2019E and 2020E EPS, respectively, which is roughly 1.5 turns above prior mid-cycle current and forward averages, we view current valuations as relatively full. Turning to our ratings changes, within t...
