This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Buy Toll as Homebuilders Are Poised for a Better Year, Merrill Says

NEW YORK (TheStreet) -- Luxury homebuilder Toll Brothers (TOL - Get Report) is a top pick for 2014, according to Merrill Lynch analysts Michael Roxland, George Staphos and Alaxandar Wang.

"An improving homebuilding environment, increasing community count and TOL's recent acquisition of California's Shapell Homes set the stage for gross margin and EPS growth in FY2014 and beyond," the analysts wrote in a note Thursday. "Catalysts include growing high-end demographics, gross margins expansion from high-end market exposure and a higher quality mix and long land position."

Home prices rose strongly in 2013, but it was not a great year for homebuilder stocks. The Merrill Lynch Homebuilding Index declined 15% on a relative basis in 2013.

An acute shortage of homes for sale and better demand drove prices of new homes higher, helping homebuilders increase gross margins by 300 to 400 basis points.

Must Read: Homebuilder Sentiment Surges

However, rising home prices and higher interest rates hurt demand for new homes in the latter part of the year, forcing homebuilders to cut back on prices.

Homebuilders have struggled to ramp up construction amid rising costs of land and labor. Household formations also remain well below their peak, which has added to their caution.

So while housing has recovered, housing starts remains one of those metrics that continue to underperform. Merrill Lynch senior economist Michelle Meyer's original forecast for housing starts was 975,000 for 2013 but dropped to 925,000 by the end of the year.

Still, a team of analysts led by Michael Roxland said in a note Thursday that 2014 would likely be a better year for the sector and are forecasting a 15% to 35% upside for the homebuilders under coverage.

"Ultimately, our thesis is still on track that housing is on an upward trajectory over a multi-year period. Specifically, we expect to see continued improvement in housing starts and better consumer confidence as consumer expectations have likely adjusted now to higher prices and rates," they wrote.

Recent data that showed November starts approaching an annualized rate of 1.1 million appear to have inspired confidence. A steadily improving job market and the fact that rates still remain relatively low compared to historical norms also bodes well for housing demand, according to the analysts.

-- Written by Shanthi Bharatwaj in New York.

Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
XHB $27.98 -2.58%
TOL $24.10 -4.06%
AAPL $93.70 -0.60%
FB $101.91 0.90%
GOOG $683.11 -0.15%


Chart of I:DJI
DOW 15,660.18 -254.56 -1.60%
S&P 500 1,829.08 -22.78 -1.23%
NASDAQ 4,266.8370 -16.7550 -0.39%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs