FBN Securities downgraded Hovnanian Enterprises (NYSE: HOV), Beazer Homes (NYSE: BZH), Standard Pacific Corp. (NYSE: SPF) and Lennar Corp. (NYSE: LEN) to "Underperform" from "Sector Perform" after one of the strongest share price rallies since 2009. The brokerage also revised rating on Ryland Group (NYSE: RYL) to "Sector Perform" from "Outperform".
On Hovnanian Enterprises (NYSE: HOV), Joel Locker, an analyst at FBN, said the downgrade comes on the heels of a 215% jump in its share price since early October. He believes HOV will continue to bleed cash and will have to issue a colossal secondary in early 2013. HOV remains a very expensive call option on a V-Shaped housing recovery and is generously worth $1.50 strictly on optionality, Locker wrote.
Beazer Homes (NYSE: BZH) rating revision comes after a similarly impressive run of 180% off its October lows, Locker said, adding that BZH possesses the worst operating margins in the sector and is over encumbered with debt. This combination will likely put off profitability until the end of fiscal 2014 or later, he noted. Unfortunately, BZH has a high probability of burning through existing cash by early 2014. Locker projects BZH to witness the largest EPS losses in 2012 and 2013 in the sector. Locker believes BZH will do a massive equity raise at some time in the next 2 years diluting future earnings exponentially.
Locker believes shares of Standard Pacific Corp. (NYSE: SPF) are 3 to 4 years ahead of its earnings. SPF has around 60% of its land inventory value in California which he thinks is a macro nightmare. He said the stock is being downgraded after the 16.8% jump in its share price after in-line 4Q numbers.
Lennar Corp.'s (NYSE: LEN) fair value is roughly $18.25/share, Locker said, citing the downgrade to stretched valuation after the 86.3% jump since October 3. LEN trades at a 48% premium to Adjusted Book Value and believe its Balance Sheet remains overrated by the street. LEN has 94.7K owned lots of which a majority need meaningful further development, Locker said. He believes Lennar's Rialto entity will fall short of expectations in coming years where housing/land prices are facing sizeable headwinds versus LNR in the 1990s.
On Ryland Group (NYSE: RYL), Locker said the stock is fully priced at current levels. "We would look to accumulate RYL shares with a retreat to the $15.00 level," he wrote. RYL has muddled along losing money in 2011 but looks to regain profitability in 2012. The stock has risen 60.9% since FBN upgrade to "Outperform" in early August.