The initial picture of the two recent earnings reports favored KB Home, given it was able to beat profitability estimates while Lennar was not. However, the stock reaction on Wednesday sent Lennar much higher on a percentage basis amid bullish commentary from Lennar executive chairman Stuart Miller.
So, it is worth an examination of why the market favored Lennar Wednesday and, more importantly, whether they are right or not.
One of the attractive aspects of homebuilders are their low price-to-earnings ratios.
Despite over 20% bull runs for each stock, that idea has not changed for either stock, with both commanding a forward price-to-earnings ratio around 9.
Lennar is slightly cheaper still, marking an 8.7 P/E ratio against KB Home's 9.1.
Analysts have noted that KB actually could end up being expensive in relation to peers after its run into earnings, promoting a pessimistic view from many market watchers.
"We maintain our relative Underweight rating, as we view KBH's valuation, trading at roughly 9.5x and 8.5x our 2019 and 2020 EPS estimates, respectively, roughly in-line with its smaller-cap peers, as expensive," J.P. Morgan analyst Michael Rehaut said.
He advised that investors temper their outlook over the next two years, even if a dovish Fed tries to carry the sector for 2019.
With some of these more bearish notes on Wednesday, the consensus has come to a "Hold" with a price target at $24.22. The consensus target is actually below Wednesday's trading price in that lens, suggesting that many think the stock has already seen its value recognized amid its rapid run to start 2019.
"We continue to believe that the company's below average growth and returns prospects are not priced in to shares at current levels and reiterate Sell rating and $17 price target," BTIG analyst Carl Reichardt, Jr. said on Wednesday. "We believe investor concerns about California, shared by us, are likely to continue to weigh on the shares in the intermediate term and will lead to underperformance."
Meanwhile, the analyst consensus on Lennar is a "Buy" with a consensus price target set at $56.61. That price target, in contrast to KB Home, still offers some room for growth from Wednesday's price.
"While 1Q EPS was slightly below our estimate and the Street, in part due to gross margins at the low end of guidance and below our estimate as well as closings being impacted by weather, at the same time, order growth was better than our estimate and above guidance as well as we believe slightly above investors' already raised expectations," J.P. Morgan analyst Michael Rehaut said.
Following the company's earnings call, shares continued to advance on the back of bullish management commentary on the housing market.
To be sure, there remained some analysts happier to wait on the sidelines amid an uncertain long term macro picture.
"The company continued to make strides towards its strategic initiatives, completing the sale of its brokerage business and the majority of its retail title, title insurance and retail mortgage businesses, and repurchasing $47mn of stock," Credit Suisse analyst Susan Maklari acknowledged, but noted that an earnings miss and a need to integrate CalAtlantic, its biggest buyout of 2018.
An interesting advantage that further plays into Lennar's lap is the "golden cross" pattern that the stock managed to gain into on Wednesday.
"The most important item you see here is the imminent "Golden Cross"(The 50-day simple moving average crosses over the 200-day SMA). That's a catalyst that often creates a bullish response that has become only more reliable recently in the algorithmic era than it had been when human traders controlled the point of sale," Real Money contributor Stephen "Sarge" Guilfoyle wrote in his column on Real Money. "In addition, traders are seeing a bullish-looking daily Moving Average Convergence Divergence (MACD) and a Fib retracement level at $50.50 that appears to have broken, which could provide support and probably allows for movement as high as $54.60 in the short to medium term."
Real Money's Bob Lang also offered a take on the increasingly attractive charts for the homebuilder's stock post-earnings.
KB Home isn't seeing the same action in its charts, meaning extra brownie points for Lennar on the day.
That, along with its valuation as well as management and analyst commentary, make it the most compelling homebuilder stock on a big week for earnings.