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"We think 1 times book (value) overstates the net present value of many builders' inventory as land sells for 15 cents to 40 cents on the dollar," Merrill Lynch said. "Land sales raise cash which is good, but highlight elevated valuations after the recent rally."
The broker noted that the builders' top markets trends are worse than the National Association of Realtors' data suggests. Merrill said its top markets' median inventory rose 1% month-over-month with sales down 29% year-over-year, compared to NAR's 3% month-over-month inventory decline and sales down 24% year-over-year.
"In the past, falling prices led to lower sales because two thirds of buyers are owners and lower prices means less equity first and foremost," Merrill said.
Earlier, JMP Securities raised its view on homebuilder stocks, arguing that net inventory levels had peaked while demand had bottomed out, though it expects demand "to bounce along" the bottom through 2008.
JMP upgraded a number of companies in the sector on its more bullish view. Pulte, Meritage and Orleans were all upgraded to market outperform from market perform, while DR Horton was raised to strong buy from market outperform. Horton's price target was also raised to $22 from $20.
Centex shares dropped 1.1% to $25.95 while DR Horton shares gained 7 cents to $16.77.
Pulte's stock rose 1% to $15.65. Greg Saulnier gs/vj
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