D.R. Horton (DHI), Lennar (LEN) and other homebuilder stocks have rallied despite limited catalysts, with lower rates likely to benefit demand before revenue and margins, Morgan Stanley said in a note Tuesday.
The investment bank said homebuilder stocks have recently outperformed, rising about 10% over the past month compared with a modest decline in the S&P 500. The rally coincides with a roughly 30-basis-point decline in 30-year mortgage rates from early-October highs.
The firm said it sees little fundamental evidence to explain the rally. Given the typical lag between mortgage rates and reported results, the quarter ended Sept. 30 likely saw limited impact from the recent period of higher rates.
As a result, the recent decline in rates should not be viewed as a catalyst for upside to calendar year Q3 results, it said, adding "any benefit would likely appear first in demand and only later in revenue and margins, with spec-oriented builders responding faster than built-to-order peers."
Morgan Stanley adjusted its price targets for several homebuilders, lowering D.R. Horton to $130 from $151; Lennar to $58 from $65; KB Home (KBH) to $37 from $39; PulteGroup (PHM) to $120 from $128; and NVR (NVR) to $4,864 from $5,058, while raising Toll Brothers (TOL) to $170 from $159.
Price: 146.69, Change: -6.24, Percent Change: -4.08
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