Homebuilder Stocks Rise on Upgrades

New York, NY, October 2, 2007--Homebuilder stocks rose Monday after a Citigroup analyst raised his stock ratings on several of the sector's largest companies on signs the worst may be behind the embattled industry.

"While we don't expect any of the builders to move much lower over the near term, we expect the larger-cap builders and those with the strongest balance sheets to benefit most from any near-term bounce -- much as they did coming out of the 1990 trough," wrote Citigroup analyst Stephen Kim in a research note Monday.

"The woes in the U.S. housing sector have been extensively documented, and we do not pretend that any near-term relief in industry fundamentals is in sight," Kim added. "However, it bears repeating that the home-building stocks have an established history of rallying well before industry fears have finished transitioning into fact."

The analyst upgraded shares of Centex Corp., D.R. Horton Inc., Lennar Crop., Pulte Homes Inc. and Ryland Group Inc. to "buy" from "hold." Their shares all rose Monday.

Although the industry is still wrestling with an oversupply of homes and the subprime-mortgage mess is still playing out, "it is difficult to see how the stocks are pricing in anything remotely approaching optimism in this regard," Kim noted. He said seasonal and cyclical factors point to improving cash flows and inventories, which may offer a glimmer of hope. He predicted a trading rally in the stocks during the winter months.

Kim downgraded shares of Meritage Homes Corp. and M.D.C. Holdings Inc. to "hold" from "buy." M.D.C. was cut for valuation reasons, while Meritage was downgraded due to its smaller market capitalization and relatively weaker cash flows.

He raised his risk rating on Hovnanian Enterprises Inc. to "speculative" from "high" on concerns over leverage and exposure to overextended markets. Other stocks with "speculative" ratings include Beazer Homes USA Inc., Meritage and Standard Pacific Corp.

Home-builder stocks have been battered this year as housing market conditions have continued to deteriorate, while tighter lending standards as a result of the credit crunch have made mortgages more difficult to secure.

Also, home builders have been taking large impairment charges as they write down the value of land held on the books.