Housing stocks are expected to offer “more modest upside” in 2020 and this year, RBC Capital Markets said on Tuesday, with builders facing headwinds on expectations that order growth will peak in the current quarter although pricing should improve.
“We believe selectivity and nimbleness are key for building products follow the (year-to-date) rally,” RBC analyst Mike Dahl said in a note. “We’re less positive on builders, more selective on building products, and continue to like distribution and aggregates.”
RBC lowered D.R. Horton (DHI) to underperform from sector perform and cut Lennar (LEN) to sector perform from outperform. Fortune Brands Home & Security (FBHS) was pushed to sector perform from outperform while Installed Building Products (IBP) was raised to outperform from sector perform.
Order growth may have peaked in the fourth quarter of 2019 and could decrease through 2020, Dahl said, bringing a headwind for builder stocks. Affordability could also remain an issue, he said. While a rebound in the housing sector could be “lagged benefits” next year, valuations in manufacturers and distributors are already reflecting that, according to Dahl.
“Potentially underappreciated margin pressures from inflation and mix, growing entry-level competition, potential for community gap-outs, and further gyration in interest rates also represent potential headwinds,” Dahl said.
An “evolving” landscape on tariffs could be a swing factor for some companies, although RBC said investor worries about a slowdown in the non-residential sector “may be overblown in our view.”
For builders, RBC said its price targets on building products were raised by an average of 9% for the group and were lifted by 7% for distributors. Targets for builders were unchanged on average.