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Homebuilder stocks adjusted for first-quarter earnings

Sterne Agee: D.R. Horton remains top pick

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Homebuilders' 2014 earnings estimates were adjusted to better align with earning reports that came in above or below analyst expectations.

Fiscal year 2014 estimates for PulteGroup (PHM) and D.R. Horton (DHI) edged higher, according to Sterne Agee’s latest report on homebuilders.    

But the one exception to this was Ryland Homes (RYL), which experienced a slight revision downward.

However, all three builders maintained a buy rating.  

Sterne Agee raised its PulteGroup estimates for FY14E/FY15E to $1.22/$1.42 from $1.20/$1.39 to reflect higher gross margins and higher overhead spending than its prior forecast.

“We believe common plan management and pricing power pushed F1Q14 eps above our assumptions, and at current levels, we view the shares as undervalued,” the report stated.  

Meanwhile, D.R. Horton’s 2014 earnings per share grew to $1.77 from $1.76, while its 2015 earnings fell to $2.02 from $2.06.

“These changes reflect a higher gross margin for FY15 than our prior estimate and a small reduction in our order growth estimates for FY14 and FY15. DHI remains our top pick, and we view the shares as undervalued at current levels,” the report stated.

"The one to fall, Ryland Homes, witnessed a slight revision in its 2014 eps to $3.22 from $3.24, reflecting an increased overhead leverage in FY14 versus our prior estimate put and the first quarter results."

But it was not all bad news for Ryland.

Community Growth Guidance for Ryland was reaffirmed at 20% year-over-year, as it’s community count grew 18.8% year-over-year in the first quarter. It is expected that the community count will increase by approximately 22.7% year-over-year in FY14. 

“We believe RYL's ability to meet housing demand while the supplies of existing and new homes in its footprint remain near historic lows is a competitive advantage versus other builders, and we anticipate product availability is a key reason for management's forecasts for Y/Y improvements in overhead leverage and gross margin,” the report said.

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