New York, February 14—-A Smith Barney Citigroup analyst on Friday cut his ratings on six homebuilders, expressing doubts that a recent sector-wide advance will support higher valuations while mortgage rates remain at historic lows.
Analyst Steve Kim said he favors owning the group of stocks in the long term and believes the market grossly underestimates the earnings power of public homebuilders, but added that a price run-up since August will likely not be the "transcendent move that takes valuation into the low to mid-teens."
"Instead, with price-to-earnings multiples approaching the high end of their recent trading range, we believe the group is likely to experience a temporary plateau in stock prices, as the pace of earnings revisions slows," Kim wrote in a research note.
The analyst said while he believes the companies are in the midst of a historic revaluation that will eventually raise price-to-earnings multiples into the low- to mid-teen range, he assumes that "long-awaited" expansion will not occur this year.
"While we remain convinced that the great revaluation will occur someday, it will likely require a material increase in mortgage rates to take place first," Kim wrote to clients. Mortgage rates, most recently 5.57 percent on a 30-year contract, have lingered below 6 percent over the past two years, compared with rates touching 18 percent in the early 1980s.
Kim reduced Beazer Homes USA Inc., Hovnanian Enterprises Inc., KB Home, Pulte Corp., Ryland Group Inc. and Toll Brothers Inc. to "Hold" from "Buy." Of that group, only Toll Brothers has a price-to-earnings ratio in the mid-teens.
In recent trading, Beazer shares dropped $4.53, or 2.7 percent, to $160.80, Hovnanian shares fell $3.24, or 5.7 percent, to $53.26, KB Home shares lost $3.96, or 3.4 percent, to $112.48, Pulte shares fell $2.16, or 3 percent, to $69, Ryland shares fell $2.33, or 3.4 percent, to $66.06 and Toll Brothers shares sank $2.84, or 3.3 percent, to $82.41.
