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Homebuilders Lennar, KB, D.R. Horton Cut at KeyBanc on Rates Worry

KeyBanc based its homebuilder downgrades on inflation concern and anticipation of Federal Reserve interest-rate hikes.
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Lennar  (LEN) - Get Lennar Corporation Class A Report, KB Home  (KBH) - Get KB Home Report, D.R. Horton  (DHI) - Get D.R. Horton, Inc. Report and other major homebuilders on Wednesday were downgraded at KeyBanc Capital Markets.

The investment firm based the downgrades on inflation concern and anticipation of Federal Reserve interest-rate hikes.

“Builders’ stocks face a wall of worry as 2022 begins, as a tightening monetary outlook negatively affects sentiment, Covid-induced inflation and supply constraints compound lagged money supply trends. And past home price gains that elevated margins will likely abate,” KeyBanc analyst Kenneth Zener wrote in a commentary.

“Tightening cycles impact builders’ stocks, with stocks falling 32% peak to trough, down 89% of the time since 1969. The sector fell 21% during the actual tightening cycle.” 

The cycles lasted 10 months, “with a lower duration of seven months during the volatile 1975-1982 period, [which] could be relevant to trading this year,” Zener said.

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He downgraded D.R. Horton, TopBuild  (BLD) - Get TopBuild Corp. Report and Installed Building Products  (IBP) - Get Installed Building Products, Inc. Report to sector weight from overweight. And he pared Lennar, KB Home, and Toll Brothers  (TOL) - Get Toll Brothers, Inc. Report to underweight from sector weight.

“We think builders’ operational success … cannot offset cyclical tailwinds ebbing (low supply, low rates) in time,” Zener said.

He offered downside price targets of $86 for Lennar $38 for KB Home and $56 for Toll Brothers. 

Lennar recently traded at $99.45; KB Home at $44.42, and Toll Brothers at $61.90, all down around 2%.

Morningstar analyst Brian Bernard doesn’t share Zener’s pessimism about Lennar, putting fair value at $117.

“Lennar closed the books on an excellent fiscal 2021 performance” and is “poised to deliver an even stronger performance in fiscal 2022,” Bernard wrote last month.

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