Top builders and building products stocks for 2024, according to Deutsche Bank

Looking ahead to 2024, Deutsche Bank has added Toll Brothers (TOL) to its list of Top Picks among Homebuilders, joining DR Horton (DHI) and Meritage Homes (MTH). Among Building Products, the firm is turning more constructive on Beacon (BECN) while maintaining its Top Pick designation on TopBuild (BLD), Builders FirstSource (BLDR) and Core & Main (CNM).

“TOP PICK” ADDITIONS: While macro crosswinds will always play a factor in Housing and Construction sectors, the recent macro backdrop has been “particularly noisy” as consumer stimulus, inflation, Fed policy and recession fears all played an “outsized role” in the space, Deutsche Bank analysts wrote in a research note this past Thursday, December 7th. Broader economy “still matters”, but the firm believes that 2024 will present more “idiosyncratic opportunities” and allow investors to capture real value over the coming 12-18 months.

Among the Homebuilders, Deutsche Bank analysts anticipate a strong spring selling season whether interest rates decline or not, selecting their preferred names on the basis of efficiency and capital discipline. The firm maintains its Top Pick stance on DR Horton thanks to its sustainable best in class inventory returns as well as Meritage Homes based on its commitment to growth, but it is also adding Toll Brothers to the Top Pick list to reflect the company’s strong momentum, solid capital allocation and favorable valuation. The firm further cites Toll Brothers’ continued buyback program and responsible use of leverage as “strong positives” that are supplementing its already favorable assessment of the company’s operational improvements. Deutsche Bank has increased its price target on Toll Brother to $110 from $96. As part of the research note, the firm is removing PulteGroup (PHM) from its Top Picks view, stating that relative valuation favors other builders at this time.

In Building Products, the analysts affirm their Top Pick view on “industry leader” TopBuild, which has benefited from more resilient performance within the single-family residential business, Builders FirstSource in the wake of its favorable targets offered at Investor Day, and Core & Main, given its long-term margin opportunities. The firm is turning even more positive on Beacon however, adding the stock to its Top Pick list. Deutsche Bank analysts believe that in Residential Roofing, pricing is poised for fresh increases in early FY24 amid stronger new construction and that an improvement in existing home sales would likely have a more immediate benefit to discretionary re-roofing than to other discretionary R&R categories. In Beacon’s non-residential business, the analysts are citing the management indicating on its most recent earnings call that contractor destocking has now largely run its course, and that the first half of FY24 has comps relative to which the category should be able to grow. Deutsche Bank has also increased its price target on Beacon to $119 from $114.

RATING CHANGES: As part of its 2024 Outlook for Homebuilders, Deutsche Bank has upgraded NVR (NVR) to Hold from Sell, Taylor Morrison (TMHC) to Buy from Hold, and downgraded KB Home (KBH) to Sell from Hold. For NVR, the firm believes that the stock’s valuation is less stretched, providing the analysts with “incremental comfort” that the company will begin to soon deploy excess cash in a more meaningful way. Taylor Morrison’s “two solid quarters” are giving Deutsche Bank more comfort with the company’s ability to sustain higher returns, while valuation on the stock has turned “more palatable”. On the flip side, the analysts point to KB Home’s returns being among the lowest in the group, and the firm warns that the builder’s book value per share growth may underwhelm in the quarters ahead.

In the case of Building Products, Deutsche Bank analysts upgraded Owens Corning (OC) to Buy from Hold based on its solid view of Roofing and Insulation prospects along with the stock’s “attractive valuation” but downgraded Pool Corp. (POOL) with a view that the stock’s outperformance year-to-date relative to the S&P 500 is pricing an “abrupt reversal” of the company “ongoing earnings deterioration”. Additionally, the research note has upgraded Watsco (WSO) to Buy from Hold based on the company’s sustainable gross margin expansion and American Woodmark (AMWD) to Hold from Sell largely as a result of the Board’s decision to authorize share repurchases equivalent to 10% of the company’s market cap. The firm decided to downgrade SiteOne Landscape (SITE) to Sell from Hold to reflect the lack of near-term demand catalysts for the company and AZEK (AZEK) to Hold from Buy on concerns that the company would rather maintain M&A optionality than programmatically invest into its own shares.

PRICE ACTION: Following their addition to Deutsche Bank Top Picks list after-hours on Thursday, Toll Brothers registered a 1.9% gain on Friday, while Beacon added 0.9%. NVR was up 1.4% and Taylor Morrison was up 1.7% on the upgrades, while KB Home was up a more marginal 0.3% despite the downgrade. Also in Friday’s session, Owens Corning gained 1.7%, Watsco was up 2.2%, and American Woodmark rose 2.8% following the upgrades. Among the downgraded names in Building Products, Pool Corp was down 2.6% and fell another 11% after-hours, SiteOne was down 0.8%, and Azek was down 0.6%.