Last week’s disappointing housing data sent shares of homebuilders lower, interrupting months of consistent gains for local homebuilders Ryland Group Inc. and KB Home, which both dropped sharply.
Shares of Westlake Village-based Ryland, which hit a 52-week high of $43 in January, closed Feb. 20 at $34.29, down 12 percent for the week. KB Home, in West Los Angeles, fell 9 percent for the week, closing at $18.03. It also reached its 52-week high of $20.04 in January. Both companies were among the largest decliners in the LABJ Stock Index. (See page 64.)
Shares across the sector were sent downward when the Commerce Department reported that January housing starts fell 8.5 percent, to an annual rate of 890,000. The numbers were below expectations, especially after new-home construction jumped nearly 16 percent in December. Additionally, the National Association of Home Builders’ index of homebuilder confidence unexpectedly fell in February after holding steady in January and rising in previous months as builders moderated their expectations for recovery in the housing market.
“This is kind of a reality check,” said Megan McGrath, an analyst at MKM Partners LLC in Stamford, Conn., who covers both companies. “You just didn’t see acceleration in growth. After a strong 2012 and a strong January, people were expecting more.”
McGrath has a “sell” rating on Ryland and a target price of $28. On KB, she has a “buy” rating and a target price of $21.
An even bigger drag on the stocks might have been disappointing earnings reported by Toll Brothers Inc., the largest luxury homebuilder in the United States. The Horsham, Pa., company’s $425 million in first quarter revenue, a 32 percent increase from the previous year’s first quarter, fell short of Wall Street estimates.
The company confirmed its full-year guidance, saying it expected to sell between 3,750 and 4,300 homes this year. While confirming guidance might not seem like a bad thing, analysts were hoping the company would raise its projections, McGrath said.
The data and earnings sent the Standard & Poor’s homebuilders index, which has gained more than 60 percent in the last 12 months, down more than 8 percent for the week ended Feb. 20.
Shares of both Ryland and KB Home have hewn closely to the wider index, posting months of consistent gains. The value of Ryland shares has increased 78 percent in the last 12 months; the value of KB Home shares is up 50 percent over the last year.
But Ryland is more sensitive to the broader market swings, McGrath said, because it is valued higher than most in its peer group.
“They’re one of the most expensive stocks in the space. For them, expectations were even higher, so Ryland was a little more vulnerable,” she said.
Ryland’s price to earnings ratio is 41, market leader Toll’s is 12.
Ryland reported fourth quarter net income of $28.6 million (55 cents a share), a 34-fold increase from the same period a year earlier. Revenue rose 68 percent to $428 million. The results beat analysts’ expectations that earnings would be 50 cents a share on revenue of $406 million.
Representatives for Ryland and KB Home did not return calls requesting comment.
Joel Locker, a San Diego analyst at FBN Securities who follows both companies, is not optimistic about the near-term prospects for the greater housing recovery and has “underperform” ratings on both companies.
“Homebuilders’ stocks had a nice rally into the spring last year and it just kept going,” he said. “A lot of it’s based on future expectations that may not materialize.”
