(By Balachander) M/I Homes Inc. (NYSE:MHO) shares were downgraded to "Sector Perform" from "Outperform" by FBN Securities analyst Joel Locker, who views the shares as fully valued.
Locker, however, wrote that shares remain appealing on the long side of pair trades within the sector.
"MHO trades at a 13 percent premium to its Adjusted Book Value of $14.62/share (using 75 percent value for Tax Assets off Balance Sheet) versus a significant discount for a majority of the last 9 months," the analyst said. MHO was FBN's last rated Homebuilder with an Outperform rating, Locker said.
MHO has risen 105.6 percent since FBN upgrade to "Outperform" on August 9, 2011.
Since besting the average 13 builders under our coverage by roughly 29 percent YTD, MHO has fallen back to rank near higher rated competitors Ryland (NYSE: RYL) and D.R. Horton (NYSE: DHI) in FBN's Homebuilder Model, the analyst wrote.
"We now have 2 homebuilders ranked Underperform, 11 ranked Sector Perform, and 0 ranked Outperform," Locker wrote in a note.
Using a blend of valuation metrics, Locker views the sector as 20 percent to 25 percent overvalued at current prices with select names being 40 percent overvalued. Gross margins may take several years to normalize with increasing construction costs and with legacy land held on the balance sheets yielding lower than market returns compared to new land, the analyst said.
"The market is already pricing in near term New Home Sales of 800K which may be a 2017 phenomenon in our view (not 2014 as the stocks indicate) and would avoid the sector until a significant pullback," the analyst wrote.
Columbus, Ohio-based M/I Homes is engaged in the construction and sale of single-family residential properties. The company provides single-family homes, attached townhomes, and condominiums to first-time, move-up, empty-nester, and luxury buyers.
The stock, which has been trading between $5.08 and $16.63 over the past year, retreated 5.73 percent to trade at $15.64 on Wednesday.