By Sam Boughedda
Toll Brothers (NYSE:TOL) was upgraded to Outperform, with D. R. Horton (NYSE:DHI) cut to Market Perform by Raymond James analysts in a note to clients on Monday.
The analysts also removed DHI's price target while installing a $61 per share price target on Toll Brothers.
They said in their note that home sales activity and buyer traffic "remain shellshocked" entering 2023, and housing markets across the country "remain in 'price discovery' mode."
"We see homebuilders leading this process early in FY23, driving prices lower until affordability is re-established. Margins will be sacrificed in order to keep inventory moving and cash flows positive," write the analysts.
As a result, Raymond James believes the market has now "fairly discounted the industry's best-in-class homebuilder," bidding up shares of D.R. Horton by 32% in the fourth quarter of 2022.
"Given the unpredictability of interest rates near-term, we still think it's important for investors to keep at least one 'line in the water' with respect to homebuilders," the analysts add. "But for now, we believe the best most attractive risk/reward opportunity lies in moving up the price point curve towards Toll Brothers (with its more visible construction backlog), which is still trading at just 1.0x tangible book value and 7.9x CY23 EPS despite its very encouraging 2023 guidance."