Homebuilder stocks struggle on new home sales report

Analysts anticipate firm rebound for building product stocks

The new home sales report released Friday morning by the U.S. Census Bureau and the Department of Housing and Urban Development created chaos for many homebuilder stocks, according to the HW 30.

Homebuilder D.R. Horton, Inc. (DHI) ended the day down 2.85%, while Lennar Corp. (LEN) was down 2.86%. Toll Brothers, Inc. (TOL) perhaps took the hardest hit, down 3.94% at the end of the day.

After yesterday’s FOMC minutes, homebuilder stocks took a hit, with only Beazer Homes USA (BZH), Hovnanian Enterprises (HOV) and Toll Brothers refusing to be shaken.

While building products stocks, such as Lowe’s (LOW) and Home Depot (HD) dipped slightly on Friday, recent data points strongly toward a firm rebound.

“Longer-term, we believe the building products stocks also offer a number of additional advantages over the homebuilders that should allow them to extend their gains into 2014 and beyond,” said Barclays in a breakdown of the market.

“We believe that powerful free cash flow generation will allow the building product companies to pursue accretive acquisitions or return cash to shareholders in the form of share repurchases and dividends,” Barclays added.

During the downturn, the building products companies aggressively reduced fixed costs and this should drive high incremental margins of 20-50% through the recovery.

Lowe’s reported extremely strong second-quarter same-store sales growth of 9.6% this week. According to Barclays, increased repair and remodeling could be a leading indicator for rising existing-home sales and inventory, as consumers tend to remodel their kitchens and baths before they look to sell a home.

Fortune Brands Home & Security (FBHS) has the highest overall U.S. residential exposure under our coverage, at 66%, with Owens Corning (OC) following at 58%,” added Barclays.

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