On Tuesday, Citi downgraded shares of D.R. Horton (NYSE:DHI), one of America's largest homebuilding companies, from Buy to Neutral. The firm also lowered its price target on the stock to $156 from the previous $181. The revision reflects a tempered outlook for the housing market, with the firm adjusting its fiscal year 2024 earnings per share estimates downward by 2% due to a softening in housing activities this summer.
The downgrade comes amid expectations of a cooling housing market, with Citi noting both a rise in supply and a moderation in activity nationally and in key markets. Citi applied a 1.9x next twelve months tangible book value (NTM TBV) multiple, reduced from 2.2x, to its updated estimates. This adjustment in valuation metrics is based on the softening of housing fundamentals.
Despite the downgrade, Citi acknowledges the long-term positives for D.R. Horton, including structural housing undersupply, the company's asset-light model, and a strong balance sheet. However, these factors are seen as being offset by the current softening of housing market fundamentals. Additionally, Citi suggests that near-term catalysts for the stock are limited until around 2025, with anticipated rate cuts by the Federal Reserve already partially factored into the market.
Citi's valuation of D.R. Horton stock as fair is based on its current trading at 1.91x last twelve months tangible book value (LTM TBV), which is close to its 10-year average of 1.96x. The firm also projects softer third fiscal quarter delivery volumes and prices, while gross margins are expected to be more aligned with consensus estimates.
Looking ahead, Citi expects D.R. Horton to maintain its full-year 2024 delivery and revenue guidance but anticipates the company may provide softer third fiscal quarter delivery and gross margin guidance. The firm also forecasts a modest increase in delivery average selling prices by the end of calendar 2024.
In other recent news, Lennar Corporation (NYSE:LEN)'s earnings per share (EPS) for the second quarter surpassed estimates, with a reported figure of $3.45. This has led to several adjustments in the company's stock target from various firms. RBC Capital maintained an underperform rating on Lennar shares, citing concerns over the company's gross margin percentage and selling, general, and administrative expenses projections. In contrast, BTIG, Barclays, and Evercore ISI all maintained positive ratings on the stock despite lowering their targets for Lennar.
Goldman Sachs reaffirmed a Buy rating on Lennar shares, highlighting the company's shift towards an asset-light model and consistent production rate. The company's strategic focus is expected to yield significant free cash flow, with projections of $3.2 billion for the current year and an increase to $3.6 billion the following year.
Meanwhile, Evercore ISI adjusted its price target for Lennar to $237.00, maintaining an Outperform rating. This adjustment followed Lennar's second-quarter earnings release, where the company reported mixed financial results.
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