Merrill Lynch Survey Shows Homebuilding Picking Back Up

By Trey Thoelcke Published May 27, 11:00AM EDT

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One of the main reasons Wall Street equity strategists, along with a few Federal Reserve governors, were getting concerned about the economy was the slowdown in the homebuilding momentum. Rising rates and a brutal winter put a kibosh on the sector, and some were really getting anxious the strength was over. In a new research report, the Merrill Lynch analysts personally surveyed and spoke to around 90 community managers for the top homebuilders across the country to gauge their views on demand, traffic, inventories, pricing and incentives. What they found was that in many top areas around the country, in states like Texas and Florida, demand had rebounded sharply and sales were rising.

Here are the four homebuilder stocks that are currently rated Buy at Merrill Lynch.

D.R. Horton Inc. (NYSE: DHI) looks like a top company that will benefit from the data Merrill Lynch received in the survey. The company is focused on making sure it has the standing inventory available to drive sales velocity and quick inventory turns. Moreover, increased urgency from first-time buyers is positive again, and that is crucial as those buyers comprise around 35% to 40% of the builders total sales. Investors are paid a small 0.6% dividend. The Merrill Lynch price target is set at $27. The Thomson/First Call target is at $25. D.R. Horton closed last Friday at $23.57 a share.

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LGI Homes Inc. (NASDAQ: LGIH) recently reported solid first-quarter earnings, and they gave fiscal year 2014 guidance in a range that is at and beyond the top analysts’ estimates. Home closings during the first quarter of 2014 increased 91.7%, to 485 from 253, during the first quarter of 2013. The company’s core markets include fast-growing cities like Houston, San Antonio, Dallas/Fort Worth, Austin, Phoenix, Tampa, Orlando, Atlanta, Tucson and Albuquerque. The Merrill Lynch price target is $19, and the consensus is higher at $20.50. Shares ended Friday at $16.01.

Standard Pacific Corp. (NYSE: SPF) is a top small-cap homebuilder to buy and may offer great value to shareholders. Like many homebuilders, the company is very positive on the spring and summer selling season. The bad winter weather may have postponed some new home sales, and demand is very high in some of its top areas like California. The Merrill Lynch price target is $10, and the consensus target is $9.44. The stock closed Friday at $8.10.

Toll Brothers Inc. (NYSE: TOL) targets the high-end home buyers and is the top homebuilding stock pick at Merrill Lynch. In what Merrill Lynch sees as an uneven housing recovery thus far, the company is a differentiated builder targeting the growing higher income demographic. Toll Brothers stock gives investors a company with accelerating gross margins versus its competitors, a higher quality product and customer mix, and the ability to further drive operating leverage. Merrill Lynch puts a $49 price target on the stock, while the Wall Street consensus number is much lower at $39.74. The stock closed last Friday’s trading at $35.50.

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With only four homebuilders rated Buy at Merrill Lynch, the company has truly focused on the names it feels have upside going forward. When the rally in the sector started, all the names were cheap as the market had obliterated prices in the brutal 2008 to 2009 sell-off. With many of the stocks rallying past their overall current value, investors need to focus on stocks that can benefit from the rebound and have strength heading into the second half of the year.

About the Author Trey Thoelcke →

Trey has been an editor and author at 24/7 Wall St. for more than a decade, where he has published thousands of articles analyzing corporate earnings, dividend stocks, short interest, insider buying, private equity, and market trends. His comprehensive coverage spans the full spectrum of financial markets, from blue-chip stalwarts to emerging growth companies.

Beyond 24/7 Wall St., Trey has created and edited financial content for Benzinga and AOL's BloggingStocks, contributing additional hundreds of articles to the investment community. He previously oversaw the 24/7 Climate Insights site, managing editorial operations and content strategy, and currently oversees and creates content for My Investing News.

Trey's editorial expertise extends across multiple publishing environments. He served as production editor at Dearborn Financial Publishing and development editor at Kaplan, where he helped shape financial education materials. Earlier in his career, he worked as a writer-producer at SVE. His freelance editing portfolio includes work for prestigious clients such as Sage Publications, Rand McNally, the Institute for Supply Management, the American Library Association, Eggplant Literary Productions, and Spiegel.

Outside of financial journalism, Trey writes fiction and has been an active member of the writing community for years, overseeing a long-running critique group and moderating workshop sessions at regional conventions. He lives with his family in an old house in the Midwest.