Housebuilders cut at RBC Capital on very challenging housing environment

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By Sam Boughedda 

RBC Capital cut homebuilder stocks Lennar Corp. (NYSE:LEN) to Underperform and KB Home (NYSE:KBH), Fortune Brands Innovations Inc. (NYSE:FBIN), Masonite International (NYSE:DOOR), D.R. Horton (NYSE:DHI), and Dream Finders Homes Inc (NYSE:DFH) to Sector Perform in a note to clients on Friday.

RBC analysts cut Lennar's price target to $76 from $79, telling investors they "view LEN's recent guidance on closings and a 1Q gross margin bottom as overly optimistic against a market continuing to see acute demand pressures and increasingly aggressive peer responses on price reductions after LEN gained share as a 'first-mover.'"

"We expect LEN to either fall short on its orders/closings guides or on its view that 1Q's ~21% guide will mark the trough in gross margin, or both," they added.

On KB Home, the analysts maintained a $34 price target on the stock, telling investors that given their view of a challenging macro environment and KBH's recent results, they "believe that Street is underestimating the magnitude of margin pressure and earnings decline in '23 and believe that despite the significant discount to TBV, the stock remains fairly valued."

Fortune Brands Innovations' price target was raised to $63 from $61, with the analysts stating the firm sees FBIN as a "high-quality asset within building products."

However, they added the "stock is now trading at 17x our CY'23 EPS est. and 15x our new '24 est., translating to 12x/11x' 23E/' 24E EBITDA, which we see as more balanced in terms of risk/reward."

Masonite International Corporation's price target was cut to $89 from $91. The RBC analysts said they "see limited room for NT outperformance given our expectation for continued housing headwinds to hit volumes meaningfully in '23, with little rebound in ’24, and our below-consensus ests."

The D.R. Horton price target was raised to $76 from $68, with RBC expecting the company will "continue to aggressively adjust pricing/incentives to maintain volumes, resulting in less severe order declines than peers" but at more of an expense to margins than Street expectations."

The analysts maintained an $8 per share price target on Dream Finders Homes, Inc., stating that while "DFH's land light model should help to mitigate some risks," they expect a trade-off between growth and margin "as the company will likely either realize significant margin pressure or be forced to walk from substantial option deals which would limit its growth outlook and still weigh on TBV."

Overall, the analysts said the firm sees a very challenging fundamental housing environment persisting through 2023 before a modest rebound in 2024.