Bank of America is getting more bullish on shares of Toll Brothers as mortgage rates decline from their peak. Analyst Rafe Jadrosich upgraded he homebuilding stock to buy from neutral, saying that the valuation looks compelling on a price-to-book basis. Toll Brothers’ long build cycle also means it has yet to see the full impact of price hikes. “TOL will face incremental headwinds from incentives and mix shift through the year, but this will be offset by tailwinds lower input costs, especially lumber (50-60% off peak),” he said in a note to clients Wednesday. Toll Brothers also bought about three-fourths of the land it owns before the pandemic, which should offer a “long runway for health margins,” he added. The company, and other homebuilder valuations, have also already priced in weakening demand and declining prices, Jadrosich added. “Macro is a concern, but housing demand and builder valuations are already at recessionary levels, and we expect the inflation and rate backdrop to be more important for stock performance in 2023,” he said of the broader industry. Jadrosich upped his price target on shares to $68 from $54, implying 26% upside from Tuesday’s close. The stock gained 19% 2022 despite the broader market rout. He also upgraded shares of Pultegroup to a buy from a neutral rating, saying that its valuation looks attractive and he sees limited write-down risk. Shares of both homebuilders gained about 2% each before the bell. — CNBC’s Michael Bloom contributed reporting
