CSFB Downgrades Three Homebuilders

KB Home and M.D.C. are exposed to speculation, it says. Ryland is fully priced.
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CSFB downgraded three homebuilders Tuesday, saying

KB Home

(KBH) - Get Report

and

M.D.C.

(MDC) - Get Report

look too exposed to frothy real estate markets, while

Ryland's

(RYL)

valuation is high.

The brokerage cut KB and M.D.C. to underperform from neutral. On KB, it lowered its price target to $75 from $82; the stock closed Friday at $75.73. On M.D.C., it left the price target at $75; the stock closed Friday at $81.51.

For both companies, CSFB warned of too much concentration in geographic regions where speculators are operating.

"Our thought is that builders with a higher exposure to markets that benefited most from speculation are likely to experience greater headwinds should investor sentiment shift," the brokerage said. Of the 14 builders it covers, CSFB said, M.D.C.'s revenue is the "most inflated" from speculator exposure, while KB's are the third-most inflated.

"While it is hard to fault MDC for being in the hot markets at the right time, we believe its exposure to investor activity raises the risk to owning the stock," the brokerage said. It pegged MDC's exposure to Arizona, California and Nevada at about 71% of the company's operating profits.

"Athough we believe KB should benefit from its current expansion into a robust Florida market with margins approaching the company average, KB remains highly exposed to Las Vegas, Phoenix and many California markets," CSFB said. It estimated that Arizona, California and Nevada make up roughly 77% of the company's operating profit.

CSFB also cut Ryland to neutral from outperform on a valuation basis, saying that at 9 times forward earnings and 3.3 times book value, the stock is approaching a peak relative to its peers. Simultaneous with the downgrade, ironically, the brokerage raised its price target on Ryland to $80 from $67; the stock currently costs $76.