What slowdown? J.P. Morgan homebuilding picks have 'years of strength' ahead

Oct. 15, 2021 9:35 AM ETDHI, LEN, PHM, MTH, TMHC, CCS, MDC, GRBKBy: Jason Aycock, SA News Editor3 Comments

Builder Working On Wooden House In Nature.

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  • Investors have expressed some concerns about the sustainability of demand and pricing in homebuilding, after a strong early 2021 (and a summer pullback) - but J.P. Morgan is staying constructive, looking to a "solid industry backdrop in 2022-23 driving further earnings growth over the next two years."
  • That's due to favorable demand drivers and some still-tight supply, the firm says, and affordability is actually "reasonable" relative to long-term averages.
  • J.P. Morgan expects total housing starts to grow 4%, and single-family housing starts to grow 7%, both this year and next year, due to current supply-chain issues eventually subsiding.
  • "Taken from another angle, we expect demand drivers – including job growth, consumer confidence and household formation – to remain favorable, while the supply backdrop should remain extremely tight, and in the event of loosening, should still be below normalized levels for some time," the firm says.
  • But the Composite Affordability Index is just slightly above levels from the second half of 2018, it says, and about 10% above its 1995-2004 average - and cost to own vs. rent and home price-to-income ratios are still at discounts to long-term averages.
  • More importantly, the cycle has "several years of strength" in front of it, thanks in large part to supportive demographics (including significantly more people turning 30 each year vs. 1998-2006).
  • It's estimating industry EPS growth of a healthy 26% in 2022, and 5% in 2023 - the latter number being a "meaningful deceleration," but still better than current investor expectations for a two-year decline - and the firm expects enough improvement in balance sheets to make for a "much higher level" of share buybacks.
  • The firm is reiterating Overweight ratings on its top ideas in the space: D.R. Horton (NYSE:DHI), Lennar (NYSE:LEN) and PulteGroup (NYSE:PHM).
  • Turning to smaller-cap (and higher-growth small-cap) names, it's upgraded Meritage Homes (NYSE:MTH) to Overweight from Neutral, while reiterating its Overweight ratings on Taylor Morrison Home (NYSE:TMHC) and Century Communities (NYSE:CCS).
  • And - expecting more in-line performance - it's downgraded two of the stocks to Neutral from Overweight: M.D.C. Holdings (NYSE:MDC) and Green Brick Partners (NASDAQ:GRBK).
  • And J.P. Morgan has issued new December 2022 price targets. On DHI, a target of $115 implies 32% upside; on LEN, a target of $127 implies 29% upside; and PHM's $71 target suggests 44% upside.
  • It sees 37% potential upside in a MTH target of $143; a target of $37 for TMHC suggests 34% upside; and the $89 target for CCS implies 40% upside.
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