(By Balachander) Tri Pointe Homes Inc. (NYSE: TPH) shares were initiated with a "Buy" rating and price target of $21 by Deutsche Bank (DB).
The bank said the two attributes that investors are valuing most highly for builders are gross margin improvement and volume growth.
"We believe TRI Pointe has strong potential for both. Moreover, TRI Pointe's solid balance sheet gives it the ability to fully invest into the housing recovery," DB said.
Irvine, California-based TRI Pointe is engaged in the design, construction and sale of innovative single-family homes in planned communities in major metropolitan areas located throughout Southern and Northern California and, more recently, Colorado.
The bank thinks builders are modeled best as land funds, with a strong balance sheet leading to better ability to grow. DB said its target price of $21 yields only 16 percent return potential reflecting generally optimistic investor sentiment regarding housing.
Investors should benefit from greater visibility into TRI Pointe's balance sheet since it is a small start-up builder, DB wrote.
The bank is of the view that the company's land assets are well placed to benefit from continuing housing recovery in California. Another benefit of TRI Pointe's start-up status is that assets were acquired post the housing bust; accordingly, investors should have little fear of lower quality or mothballed land parcels.
DB thinks TRI Pointe should trade at a premium due to its growth and margin profile. Risks for TRI Pointe include its high concentration of land in California, its smaller size and execution risk with regards to TRI Pointe being a startup company.
The stock, which has been trading in the 52-week range of $17.50 to $19.99, rose 2.16 percent to trade at $18.45 on Monday.