The COVID-19 pandemic has spurred major demand in the US housing market. Remote working has increased the relevance of home beyond the basic shelter needs. Following the easing of lockdown restrictions, sales of new homes increased due to historically low mortgage rates and demand for houses in the suburbs.
After touching record-highs in September, October and November, the National Association of Home Builders/Wells Fargo Housing Market Index (HMI), which indicates homebuilder sentiment, was still strong in December but fell four points from November to 86.
“Housing demand is strong entering 2021, however the coming year will see housing affordability challenges as inventory remains low and construction costs are rising,” stated NAHB Chairman Chuck Fowke.
Bearing in mind the changing dynamics in the housing market, we will use the TipRanks Stock Comparison tool to pit homebuilders D.R. Horton and Lennar against each other and pick the stock offering a more attractive investment opportunity.
D.R. Horton (DHI)
D.R. Horton, which owns brands like D.R. Horton, Emerald Homes, Express Homes and Freedom Homes, is the largest homebuilder in the U.S. in terms of volumes. The company has a strong presence in 88 markets in 29 states across the country. It is further expanding its business in key markets and recently acquired Texas-based Braselton Homes.
The company ended FY20 with blowout 4Q (ended Sept.30) results—revenue grew 27% year-over-year to $6.4 billion and EPS jumped 66% to $2.24. The quarter saw an 81% jump in net sales orders to 23,726 homes.
Looking ahead, the company believes that it is well-positioned to deliver a strong performance in FY21, backed by strong sales trends, 38,000 homes in inventory and an ample supply of lots. Also, it ended FY20 with a robust sales order backlog of 26,683 homes (a 96% year-over-year rise). (See DHI stock analysis on TipRanks)
Covering D.R. Horton for Truist Financial, analyst Rohit Seth recently upgraded the stock to Buy from Hold and boosted the price target to $100 from $58. Seth noted, “We believe the millennial-driven housing boom has significant runway, as the largest cohort of the largest generation heads into their prime home-buying years (2020-2025).”
The analyst explained that the homebuilders who are well-positioned in the entry-level market segment and can continue to supply homes at affordable price points are the ones who are in the best position to take advantage of the millennial tailwind. Seth believes that D.R. Horton is the “benchmark play” for the millennial wave next year.
On Dec. 18, Barclays analyst Matthew Bouley also increased his price target on D.R. Horton to $95 from $81 and reiterated a Buy rating. The analyst is optimistic on homebuilder stocks as a group heading into 2021. He noted that homebuilders are trading at only 1.4 times 2021 tangible book value in a year where “exceptional” pricing is likely to drive higher gross margins not seen since 2013.
All in all, D.R. Horton scores a Strong Buy analyst consensus that breaks down into 11 Buys versus 2 Holds. The average price target stands at $89.38, indicating a 23.3% upside potential from current levels. Shares have already surged 37.7% this year.
Lennar Corporation (LEN)
Lennar is one of the leading homebuilders in the U.S., with a focus on first-time, move-up and active adult buyers. Last week, the company reported better-than-anticipated 4Q FY20 (ended Nov. 30) results as improved margins drove a 32.4% rise in EPS to $2.82.
The company’s revenue also came in ahead of expectations but was down 2.1% year-over-year to $6.83 billion as deliveries fell 2%, reflecting the production loss to COVID-19 earlier this year. Meanwhile, 4Q new orders grew 16% to 15,214 homes but were lower than the growth experienced by several rivals like D.R. Horton in the comparable period.
Lennar ended FY20 with an order backlog of 18,821 homes (up 21%) and expects FY21 deliveries between 62,000-64,000, compared to 52,925 in FY20. (See LEN stock analysis on TipRanks)
Lenner’s 4Q results prompted BTIG analyst Carl Reichardt to increase his price target on the stock to $104 from $99. The analyst reiterated a Buy rating, citing the “big” 4Q earnings beat and “surprisingly good” FY21 guidance. He added that the company’s operational, cyclical, and strategic metrics are all moving in the “right direction.”
Reichardt noted that Lennar is transitioning from a company focused on being a “better-in-class” real estate investor to a “scale-levering, efficient manufacturer of homes.”
Barclays analyst Matthew Bouley also raised his price target to $91 from $84 in reaction to the results. That said, Bouley downgraded the stock to Hold from Buy. The analyst made a relative valuation call on Lennar. He acknowledges that the company continues to “fire on all cylinders,” but its shares offer less upside compared to other homebuilders in 2021.
Overall, the Street is cautiously optimistic about Lennar, with 9 Buys and 5 Holds adding up to a Moderate Buy analyst consensus. Analysts see a possible upside of about 20% in the coming months given the average price target of $95.31. Shares have surged 42.7% year-to-date.
Conclusion
Homebuilders in general are expected to gain from continued demand in the housing market and an anticipated rise in prices due to the undersupply of new and existing homes. Currently, D.R. Horton’s strong operational performance, its leading position in the entry-level housing market and higher upside potential make it a better housing pick than Lennar.
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment
