J.P.. Morgan

J.P.. Morgan US Equity Strategy 100 Ideas Levered to the Housing Recovery Housing market fundamentals remain constructive with a pick-up in demand, tightening supply, high affordability, low household leverage, and easing credit standards. Taken together, we believe these are likely to be drivers of an outperformance of equities levered to the housing recovery. In this report, we identify 100 such companies with direct or indirect exposure to housing from a diverse list of industries — the mix ranges from the obvious Homebuilders and Building Products to derivative plays in Durables, Retail, and Financials, see Figure 3. After more than six years into this recovery, we believe there are few opportunities in US equities that offer stronger growth and cheaper valuation than housing. Key variables for housing recovery — the job market continues to strengthen, consumer confidence remains elevated, level of interest rates remains relatively low and risk to housing from rising rates should remain contained over the coming quarters. We recognize housing is interest-sensitive and the Fed is about to embark on a tightening campaign. However, long rates which matter more for housing are already pricing in Fed rate hikes. Even if the Fed surprises by tightening faster than what the market anticipates, LP. Morgan expects to see a curve flattening and conventional mortgage rates should not move nearly as much as the funds rate. Historically, bear flatteners are not associated with negative performance for housing stocks. As shown in Figure 34, homebuilders have outperformed the market during bear flaneners. On the contrary, bear and bull steepeners cany worse implications for performance, underlining the importance of long rates for the housing market. J.P. Morgan Economists expect residential investment growth of 8% this year and 7% in 2016. Despite the 63% increase in residential investment from $366b at the bottom (3Q10) to $595b, current activity remains depressed at 3% of GDP (vs. 4.7% avg since 1949). Outside of key macro level data suggesting significant residential investment growth, commodities linked to housing are rising and the recent search trends point to an improvement in homebuyer interest (see Figure 22). The following drivers bode well for a continued recovery and growth in residential investment: • Demand: should firm on strong labor market trends (declining unemployment rate + expected rise in wages), high consumer confidence, stronger household formation, and low vacancy rates. Since the start of the recovery, the economy has created more than I I million net jobs with the unemployment rate approaching 5%. This combined with near-peak consumer sentiment is encouraging household formation. Due to the severity of the last recession, we believe there is pent-up demand for housing, with household formation at a deficit of around 5 million, see Figure 20. Also, buying vs. renting is becoming increasingly more attractive with the median home price to rent ratio at the lowest level in 15 years, see Figure 32. • Sum*: tighter with new and existing home inventory sharply lower. The existing home supply declined from -4 million units at peak to 2.3m recently, which is similar to levels seen prior to the housing boom. As for new home inventory, the supply is even tighter at 215k units compared to 570k at last peak and 300k prior to the last housing boom, see Figure 23. If adjusted for population growth, the current supply picture looks even more constructive. Global Equity Strategy and Quantitative Research 13 August 2015 US Equity Strategy Dubravko Lakos-BuJas AC (1-212) 622-3601 [email protected] Bhupinder Singh (t-212)622-9812 [email protected] Scott A Linstone (1-212) 622-9970 scott.a.linstonegnmorgan.com Narendra Singh (t-212) 622-0087 narendra2.singh©jpmorgan.com ArJun Mehra (AJ) (1-212) 622-8030 alun.mehra©jpmorgan.com J.P. Morgan Securities LLC Table of Contents Executive Summary 1 Industries Levered to Housing 3 Housing Stock Performance 4 Valuation. Growth. Sentiment 5 Stock Screen: 100 Ideas 6 I-lousing Macro Rivers Derrend 9 Supply 11 Aft ordablity 12 Credit 14 Relative Valuation 15 Commodity Prices 16 Equity Fundamentals 17 Characteristics of Housing Stocks 20 Housing Basket JPAIMOUS <tides> 24 Bloomberg subscribers can use the ticker JPAMHOUS <Index, to access tracking information on a basket created by the J.P. Morgan Delta One desk to leverage the theme discussed in this report. Over time. the performance of JPAMHOUS <Index, could diverge from returns quoted in our research. because of differences in methodology. J.P. Morgan Research does not provide research coverage of this basket and investors should not expect continuous analysis or addreonal reports relating to it. For more information. please contact your J.P. Morgan salesperson or the Della One Desk. See page 28 for analyst certification and important disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. www.jpmorganmarkets.com EFTA01071289 Global Equity Strategy and Quantitative Research 13 August 2015 Oubravko Lakos-Bujas (1-212) 622-3601 [email protected] J.P. Morgan • Credit: household balance sheets at best level in more than a decade as lenders easing standards. During this recovery, households have significantly delevered, with current household debt at the lowest level in more than 10 years and mortgage service ratio at an all-time low, see Figure 36. Also, a higher percentage of homebuyers are likely to qualify for a mortgage loan with more lenders easing rather than tightening credit standards. And for some, credit scores should be improving as foreclosure related hits on credit reports cycle through after 7 years on record. • Value: compared to most asset classes, relative valuation more attractive for housing. Residential homes sell at a discount to equities, gold, and oil (i.e., it takes 137 units of S&P 500 index to purchase a median priced home in the US, which is a 48% discount to its long-term median of 260 units, see Figure 39). Even after the recent decline in commodities, Homes are a cheaper hard-asset alternative to Gold, see Figure 40. • Risk: rising home prices to household income ratio and higher rates a concern. While the job market outlook has improved homebuyer sentiment, the tepid rise in household income (+5% since 2010) compared to a more significant rebound in home prices (up 34% from the low) is a risk to a more robust housing recovery, in our view. Consequentially, the new single-family home price to household income ratio has risen to near record (5.4 years vs. 4.0 median since 1966), see Figure 42. Also, as the Fed begins to raise rates, this could be a further negative for affordability given that every 50bp increase in mortgage rates is equivalent to roughly 5% increase in home prices. However, we feel that the most likely scenario is a bear flattener under which the mid-to-long portion of the curve (which is more important for mortgage rates) is less affected. Housing stocks enjoy stronger fundamentals with domestic exposure at a cheaper multiple than the market: growth at a reasonable price. After more than six years into this recovery, we believe there are few opportunities that offer stronger growth and cheaper valuation than housing. In fact, if housing stocks were a unique GICS sector, it would offer the strongest earnings growth and second cheapest valuation. Based on consensus estimates, housing stocks are expected to grow earnings by roughly 50% vs. 30% for S&P 1500 companies during 2015 through 2016. As for valuation, we believe the domestic linked housing sector does not deserve multiples inline with the cheapest Materials sector, which has meaningful exposure to China. • Improving sentiment implies that investors no longer view housing as toxic and there could be additional accumulation by institutional investors. Whether you gauge the sentiment by the Street's analyst ratings or short interest, housing stocks have seen market participants slowly turn more constructive. Housing stocks have an elevated short interest as % of float (4.6% current vs. 17% at peak) compared to rest of the market at 3.6%, see Figure 10. The Street's sentiment has also been improving with the average stock rating now similar to the rest of the market, see Figure II. • Higher revenue growth and margin expansion is expected to drive double-digit earnings growth. Housing stocks on average offer stronger revenue growth between 5-6% in the coming quarter compared to low single-digit growth for S&P 500 (ex-energy). This combined with margin expansion is expected to drive double-digit earnings growth in the upcoming quarters. • Significant margin expansion: the Street is expecting significant expansion for housing with net margins expected to increase from 6.4% (last four quarters) to 7.1% over the next four quarters (3Q15-2Q16), see Figure 50. Based on estimates, margin expansion is expected to be driven by declining commodity prices while SG&A expenses are expected to rise. • Shareholder yield now near 5%, higher than S&P 500. Perhaps due to the uneven growth and highly cyclical nature of most companies levered to housing, the shareholder yield has been volatile. In the last twelve months, the total shareholder yield increased to 4.7%, which is higher than the S&P 500 at 4.1%, which is attractive for yield-seeking investors in a scarce yield environment. J.P. Morgan US Housing Basket (JPAMHOUS <Index>): a preferred way to play the recovery in housing. The J.P. Morgan US Housing Basket is composed of a diversified portfolio of companies that have direct or indirect exposure to the US housing market and should benefit from the continued pick-up in residential investment. Basket constituents are screened for liquidity (trade at least $1OM ADV), and include direct beneficiaries of housing (e.g., Homebuilders, Building Products) as well as derivative industry plays (e.g., Durables, Retail, Financials). The basket contains 65 names, and the weights are optimized to replicate as closely as possible to an equal-weighted basket, subject to a maximum of 10% of ADV traded in any single name within a $100M basket. The basket can be accessed on Bloomberg via ticker JPAMHOUS <Index>. • Basket Performance: An examination of hypothetical performance shows the basket — JPAMHOUS <Index> - would have returned +17.7% on an annualized basis over the last three years, narrowly outperforming the S&P Homebuilders Select Industry Index (SPSIHOTR Index), which returned +17.3% over the same period. The correlation of the basket to the SPSIHOTR Index is 93%, and the recent 6M realized volatility of the basket is 11.9% (the realized volatility of the SPSIHOTR Index over the same time frame is more than 2 vol points higher at 14.1%). 2 EFTA01071290 Dubravko Lakos-Bujas (1-212) 622-3601 [email protected] Global Equity Strategy and Quantitative Research 13 August 2015 J.P.Morgan Equities Levered to a Recovery in Residential Investment Housing market fundamentals remain constructive with a pick-up in demand, tightening supply, high affordability, low household leverage, and easing credit standards. Takcn together, we believe these arc likely to be drivers of an outperfonnance of equities levered to the housing recovery. In this report, we identify 100 such companies with direct or indirect exposure to housing from a diverse list of industries — the mix ranges from the obvious Homebuilders and Building Products to derivative plays in Durables, Retail, and Financials, see Figure 3. We recommend investors gain exposure to housing stocks for their growth at a cheaper valuation. Figure 1: Residential Construction as % of GDP Figure 2: Residential Construction Since 1949 USD billion, sear so:o 2% 1119 1964 1959 1961 Me 1974 1979 1904 1959 1994 1999 2001 2009 2014 Source: J.P. Ragan and Blacoterg s)e6 A91 sera 5519 5616 $516 SSBS 95tI 3619 5196 am 3400 3210 3160 - Source: J.P. Morgan and Bkcirsig Figure 3: Industries Tied to Housing See Figure 12 through Figure 14 for a full list of 100 ideas bed to the housing recovery Mortgage/Title Insurance Mortgage Finance Regional Banks Financials Single-Famil y REIT-As Land Plays Internet Services Real Estate Brokerage Source: J.P. Morgan Homebuilders 4 Housing Business Services Construction Materials Timber/Commodities Chemicals Building Products Electrical Components Building Electrical & Mechanical 44 1/4 Household Durables Retail Mechanical Specialty Retail Home Improvement Retail 3 EFTA01071291 Duhravko Lalcos-Bujas (1-212) 622-3601 [email protected] Global Equity Strategy and Quantitative Research 13 August 2015 J.P.Morgan A diverse list of industries tied to a recovery in housing. In this report, we identify approximately 100 companies that have direct or indirect exposure to US housing and should benefit from the continued pick-up in residential investment (see Figure 12 - Figure I4 for a full list). As shown below, the housing plays range from direct beneficiaries of housing (such as Homebuilders, Building Products, and Land Plays) to derivative industry plays (e.g., Durables, Retail, Financials, etc). The housing plays that we identified have a combined market cap of $592b and represent 3% of total market. As shown in Figure 5, these companies offer significant sector and industry exposure. Figure 4: Sector Breakdown: Housing Composite Figure 5: Industry Breakdown: Housing Composite P4 Mt Kyr 144 Lei Mee. Pelynan• WO companies. equal-weighted 44efla Technology, 2 Median MC* I Miley I Wawa OD n TIE 1Tr an 1.14344fteCtetes 25 1331 111 1125 lib 01% 45% •53% Say Peak 1 1413 la 3124 24.04 .11,4 41% •1241% Dana SW 1134 Mb let a a 411% VI4ten313, 14 an bee hien' ri.es lilt alb VP VA a a '7% Ronk ;WS 7231 It* 2434 la* 4% 42e4 •14% twee/ 4,1)4 Ilk 1434 1144 -17,4 4% PC% hen 2344 1274 1625 lib 4% 43% ail ,. Tow: too Rad Elianingan /Cod Companke Re 7244 3134 9134 1% I% pit 1114,2%**Faao 2111 141 Mb It 22.1% 4:1% 41414 Cak033.424114 1331 1234 4/34 I* *a 41% •11,4 Pare 4423012243:5 1234 tik 4Th Ha 4% •11,4 •21% Tel% Covreed Deena 3.141 21k 24/4 21* 44% *II% 43% Ens SW lit NA 13.24 41% 45% 42% Industr4I3 24 Mums 60444 SI . ISA Ilk 43% 4,4% 4a 114323444grear 100 11.44 lb Mb *7% al% A% 0442441 3* 2141125 21* Oa 414% II% Pere &Cato WY 3311 1St $34 Kb a .12% 4b: ituatiOnict SR 1St Rh la 41% 431% 4% Source: J.P. Morgan 1.4424*boul. Sassis 4314 110h . lit* a% AS% 4014 5:409 2712 a fl u lib .44,4 .41% OM Source: J.P. Morgan. Blomberg A lost decade for housing equities. Over the last ten years, housing stocks have sharply underperformed the market due to poor demand (low household formation) and excess supply (foreclosure homes). As shown in Figure 6 below, the peak to trough decline for housing stocks was -89% (similar to Nasdaq composite decline). In absolute terms the recovery in housing stocks has been strong (+374% from the bottom vs. +218% for S&P 1500), but it is still 47% below its all-time high in 2005. We believe housing stocks are likely to outperform the market over the next several quarters due to stronger relative growth and cheaper valuation, as discussed in the next section. Figure 6: Performance: Housing Composite vs. S&P 1500 Figure 7: Performance: Annual Performance Indexed me xe 293 to 100 on 1/1)2000. equal-weighted Housing Composite Annual, absolute and relative to S&P 1500 Absolute Pedormar 442% 428% .311% WS .4% .52% 41%01% .14% - +1% os -1% 49% -17% 200 -50% -51% 150 Relative to S&P 1500 103 47% nn *X% nn 42% K2% 441% OS 13% 50 58P 150 ■ Wi% 4% 41% 1Mr 47% 41% -32% 0 .51% 2000 2001 2002 2003 2001 2005 2006 2007 2006 HOG 2010 2011 2012 201 2311 2015 Source:J.P. Morgan. Blomberg 90 91 '02 TO DO 'C6 '06 17 18 TO 10 11 12 13 14 IS Scurce:J.P. Morgan. Blocrnberg EFTA01071292 Duhravko Lakos-Bujas (1-212) 622-3601 [email protected] Global Equity Strategy and Quantitative Research 13 August 2015 J.P.Morgan Growth at a Reasonable Price? After more than six years into this recovery, we believe there are few opportunities that offer stronger growth and cheaper valuation than housing. After multiple years of undcrperformance, housing stocks trade at a significant discount to the market even with stronger expected growth than rest of the market. • If housing were a unique GICS sector, it would offer the strongest earnings growth and second cheapest valuation. Based on consensus estimates, Housing stocks are expected to grow earnings by roughly 50% over a two-year period — this is stronger than the organic growth sectors (Healthcare and Technology) and the lower oil price beneficiary (Discretionary). As for valuation, the multiples are as depressed as Materials, which is tied to the slowdown in China while housing is largely a domestic play. Figure Housing 35.0a 30.0a 8: Valuation: WE (2016) Figure Housing 475% *SO% 9: Expected Earnings Growth: 2014-2016 AD% Stocks vs. SAP 1500 Companies Stocks vs. S&P 1500 Companies 25.0a 2ux alto 425% dim 41% 4.y. 437% +a% 422% 413% +31% 241.5x 20.0z IDS .0% 4% ish t5b 14.04 %Is lib Mk 111.1% aW 15.0z I .25% 47% lot .50% " 44 Ji nn/ 41 4/ te r st, 41 41 0 ,771"/ iDe Source:J.P. Morgan. Bloomberg Source:J.P. Morgan. Blomberg Improving sentiment implies the sector is no longer toxic. Whether you gauge the sentiment by the Street's analyst ratings or short interest, Housing stocks have seen improvement in sentiment by market participants. Housing stocks have higher short interest as % of float (4.6% current vs. 10-Yr median of 5.0%) compared to rest of the market (3.6% vs. median of 3.4%), see Figure 10. The Street's sentiment has also been improving with average stock rating now similar to rest of the market (Bloomberg Mean Rating: I= Strong Buy, 4= Sell). This implies that the sector is slowly normalizing and less likely to be viewed as toxic by investors and could see continued accumulation. Figure 10: Investor Sentiment: Short Interest as % of Float Figure 11: Street's Sentiment: Average Stock Rating Median Median 1t0% ID -- Hewn; Co-post4 Homo; Crpost4 red= —saPI500 IS SW 1930 sedan 20 25 30 35 1t0% 140% 12.0% 10.0% 10% 10% 4.0% 2.0% 0.0% 110 117 2 '03 to IS 16 Source: J.P. Morgan. Bloomberg Undemerfsesia —SIP 1500 S&P 1500 neap '07 %II 99 10 11 12 13 14 15 DS 111 '02 1.1 '111 t6 -06 117 to TA 10 'II 11 13 14 15 Source. JP. Maslen. BIcemberg 23 24 5 EFTA01071293 Quhravko Lalcos-Eujas (1-212)622-3601 [email protected] Global Equity Strategy and Quantitative Research 13 August 2015 Equity Plays Levered to Housing Theme: in the tables below, we identified housing-related stocks levered to a pick-up in residential investment. Figure 12: 100 Ideas Levered to Housing Recovery (continues to next page) Price as of as of 8/12/2015 GCS 54cte1.6..8) nIZZCZTIONI S" W' Chenkit I 2 3 4 s 8 7 8 Contlivellontlawitlx 9 10 II Pea å ~I Products 12 13 14 — Er=lillieleS 441011 Atrotpue 4 Oanst 15 0:«59,) IF1.11.1>AX,90~51:n TOW tawny SW* Ma Nil (%l al Ce901.1 Techrialt WU Eillmalt Villoill0.1 Cvnrt P6P) 524* Ifhph, 10.4 Mutt Cep Am) Vol Owl 124,c4 Crone VTO 141019 7~1 Te/5.1 Prat OM* 51,01 Avg 11$241147~111 is % et ASI I=441 Stck LOA Oil 34087 5•1.4 %ItiCt 54191 Grate. NW EPS 0.4411 N111 EN MITOA LIM PIE NW Pal PC, YNN Wa" Aks — — $3.178 $31.0 9% 0% —— 10% 3% ID 31 14% 5% it% 1234 172a 24z 5% Industry. C44.44414 aentn.‘14a-r8 Corer/ BuiOng/449P34 WesItCroncåC<t3tacr, 1140rp *rat Vabou CAwalAi 1340r0 409,04 RP1.11.41~.1 Ix. &tarp *rat satoket*ooconterromeaciformbfor, Pc150ne ~alp, &tarp Ltienit 44.51Cators»n 13.40r0 409,64 lens 9.5r114.4e. Pc &40rq/44enit Indt$113: 6~ 1~ ItIn 1 Nall 144-414144en14 Irc Burdlil /Alt/at DP War" bc. EkidrulAiltr“ ItellAfllS FOXPOZIas, &Id Mittat lipluary: F444111 Foreu Produces 10.4~1..494tCOrtenton &ilk.) Willa SpieCascra C4 Kildtg Dahlia Piic int. 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Blomberg J.P.Morgan 6 EFTA01071294 Dubravko Lakos-Bujas (1-212)622-3601 [email protected] Global Equity Strategy and Quantitative Research 13 August 2015 Figure 13: 100 Ideas Levered to Housing Recovery (continues to next page) Price as of as of gi12(2015 34 35 35 sr 30 tC *tte?0Al tnce, 1PMW.6np Omaitakn TO4r CagnY Stab Price Pal N JP11Coverag9 Teclnkb NES Estimates Verbs O07011 R1/44 52 Ill. 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Koren. irc Ibreetukke WO WM 30119 sio.ms $1038 41% Id N Mead Ream CFA .1% It% 25% II* 110* It 7% 44 Lean C0,10,810.1014314 Itnitylin LEN 551.13 $1136 $8949 51630 42% 15% OW WISP Renart CFA 4% 23% 17% Ilk 14.14 214 7% 45 PatotaIrc Hortatukt HIV 120.40 23417 $1.260 $1172 Id% .4 UW LkInd Brat CFA 1 II% 7% 10.34 1414 It 11% 45 T011tate4.1ct 14)01)(0344 Ta 539.22 Mt 58105 $953 19% 13% VW 1.4000144614 CFA -11 20% 19% 143* 15.14 1.74 6% 47 Usti & Rat IrcoTaratd 5.3rg Prctri LEG $47.71 61,23 $6525 $480 45% 12% 6% 16% 1114 21.14 619 4% 48 1.511.1‘ Itaitolyer 61911 51.51192152341051 $6143 $425 34% N 1.40001449404 CFA -11 20% 35% 1014 1594 419 5% 49 Slardad Pads Cap Iteenulke SPF kW 90 $2426 $01.1 Id% 13 NA Lkluel that CFA 28% 36% 1214 122* IA 11% 50 TRINE* GIcu01,4 Itnitowr TPH 571.49 17113 52391 sae 10% -3% 98% 78% 24.14 107* It - 51 RItr4Gro4.1r4 Honnunte RYL 14413 6030 WS $102 83% 13 NA 1.441.41 that CFA 17% 15% 1021 11.44 It 14% 52 Ve111916o*60Y10•414r. Itaity114( MTH 542.33 5022 51.111 5230 13% 20% UW 14440014494•4 CFA 1% 24% 32% 1444 10.44 1.54 9% 53 U.D.C. HAIN% tc. Honetukt MCC 129.52 3121 $1.441 $233 9% II UW I.4chad that CFA 28% 72% 202* 14.34 1.84 a 54 NB none 14)1*(0344 584 $1528 11112 51.413 804 4% -7% N 1.44100144614 CFA -2% 34% 71% 3524 1214 094 10% 55 L4203nt Inaarp:raled Rad L2B 5840 2919 $1275 III 19% .7% 9% 23% 104* At 144 2% 93 Ellin A6n 111141,11nC Rat E1H E/345 3323 $930 $88 34% -I 8% 25% 83* 11.14 244 - 57 61trn 44n tam Ons A 'brava* YIN 12414 27117 $603 It.? 2% SI CM Wind Rabat CFA 0% 20% 121% 1434 964 EN - 55 Tag Cr MOPS 9n)C440 044314344)146144 TWO 18.01 21115 WO 375 12% 8 OW MONO Nu% CF A 10% 17% -8% 1644 *6 044 - 0 *a annuli.* Ire Hateatuat WIG $24.21 8417 KW $3.1 13 N PAchad Rabat CFA 4% X% 30% 1444 1544 IA 9% co mown. In Itnglii314 1.165) 524.54 26119 809 350 21% 8% N 1441100174604 CFA -1% 23% 47% 113* 1114 1.24 12% 61 Deans Hums USA. hc, Horretulke BM 11/19 21114 $561 NA II% .12 N PActnel Attu; CFA 4% 27% 135% Aix 91. 1.14 - 32 La Itn6i. ht Potrotol7v LOH 524.67 25112 086 $41 34% 64% OW MOW Rffist, CFA 5% 43% 61% BM tat 20 - 63 Caron Connone7 Ire ittlitillke GCS $20.93 2314 $449 325 10% 8% N lAchaelAthat. CFA 4% 93% 94% NA St 1.84 - 64 Nen Hone Ca, In: Potrotol7v HMV $13.98 1913 $230 308 7% -4 MOW RHINA CFA 0% 104% 229% 8334 14. 1.54 1% 65 It.mn a- Ent;n7n, n:.CbssIttlito11H HO? $1 411 $217 $3.7 a% a% N IMrod Rthat. Cf A 19% 51% MU 184 RA 17% Olsintoton Industry: DIPalt. ars — — San $340 1 14% 2% 03 34 1.5% 4 18% lit 119* 2.74 5% 93 PON C4440•41:n ROI POOL $70 7 31435 5147 11% 3% 53 34 3 8% 15% 1594 2294 1194 4% Went 5 Caulog Relall lidualh: Intrae 1 04464.3 WI — — $66511 $153 27% 17% — 10% 00 4.2 4.3% 17% 19% 1174 2644 1104 4% 67 KW Ix. RaW HMI $42.93 BIS' $1335 MB 14% .11% 4% 38 45 0.7% 6% 12% 1244 1664 293. 6% Source. J.P. Mcocal. 8lcanberg J.P.Morgan 7 EFTA01071295 Duhravko Lalcos-Bujas (1-212) 622-3601 [email protected] Global Equity Strategy and Quantitative Research 13 August 2015 Figure 14: 100 Ideas Levered to Housing Recovery Price as of as of 8112/2015 Company Ws Prloo ParlEll IPE Cortwo WNW. 14415 WNW ValuatIon 52.311 449 Tor 9ww MO*, No:Wm SON EPS Ea Covell NW 11.514% Vol 12.rot POE 41%a RE I r GE SW LW Orora WAN EWINI PE FCF GCS SWAKLOY 0/ °WV $4111wca044563444 TON *a la Cap IwO Own]. YTO 14044 AWE WW1 cki scow S. Out %WC.; 1451/ NEI AEI ME PS VW teNNIN RES Indslty 3WGIN RENO — — $8231 MI li% 4% — — It% T% 4$ 3* 22% 6% 15% 103 1114 3.111 1% f8 Mao Wol It NW HO $11749 11913 5152176 $405 46% 12% ON GYactio/ Nowt CFA 1% I% 58 42 II% 6% 19% 124x a 16.64 5% II WA Conents In NW IOW $4847 73*) NEAT LEIS 45% 1% ON [townie, 74:nn. CPA 21% 1% 51 44 43% 6% 31% 11.h *IN 0* 5% 70 OW 040 tOwoN cric NIIN tw' 144* 8341 $10327 31451) 1% .10% N °none, 7I:n4w. CPA 3)% I% 37 32 211% 4% 0% 7* II* 428 6% 71 WaanrSawws 1c NIW VCS4 WIS) 0707 37410 $810 26% 14% ON °none, 7I:n4w. CPA 76% 5% 03 40 21% 10% 18% 10* 223E 044 4% 72 REtcralto Harlon Helfros IF1414 RH 55440 KG70 534% 952 22% 4% 23% M 43 00% 25% 48% 17.E 27.2a SM 1% 73 *maxim. Ws AAN 411.15 3323 52.:31 436 41% 22% 5% El 43 - 12% 19% Inc 14.75 Its - 74 Races Fools*. CCIPINII %:430' Hy 12266 2600 1.150 120 0% 1% 2% 93 50 04% 7% 19% 87. ISE 1.74 6% Sorter Column Su • tot Sector Conswer Shpin - - $11462 4414 IT% (1% -- 3% 54 El 12% 3% 0% 13.7a 1th 344 4% No.4.:40 Poogry Ind•rhy Wnoheld Products - - MAU 01.4 21% 5% -- 11% 3% U 34 V% t% 6% 1106 Mk 7.11 4% C4 trot Guttn& Nitforiso CAM CEIBA f11.33 117 WI SIB 21% 19% 3% E 37 - Soucy F OS Swot NEWEL - 13414 1234 11% 2% - 3% SI 3/ 6.5% T% 9% 17.13 %Ix 136 5% 84n6 6 InOrsuy 8.418 - - MU 1132 15% I% - - IS% 3% St 35 02% 8% 12% 19.33 14.43 1.54 5% /6 F nt RNA. c Bps Ro(cui Boris FRC WIC ISIS 11117 WI 371( 23% ON SkocAle0401. CFA E% 2% SS 37 OA% 17% 14% NA 17.N. 2.1. 6% IlvIllo & NerIptor from. IntIssav 1104 4 11c09s96 Gnaw - - 11210 HO 16% II% -- 4% 5% Si *A 52% I% 3% 2454 1744 t3a 7% 77 RENA On. Pc craw RON 116 33 1St) 53125 WA 45% UM 11% 51 44 53% .3% .4911 MA Ilk 1A4 IS% 78 MSC %%Oros Coscralcn Crave* PTO ME 127 33715 1625 46% IT% 14% 49 39 00% 6% 6% MA ILE 3.06 14% 79 WahoSAILEco Kt Froroa Swoon VO 12402 2413 $743 169 76% 39% 2% 42 34 62% 7% 3% 92( aft Ma 9% 60 literrew. Pc. troorte MGT WE 2416 $191 525 25% 29% 5% 49 4.7 - 25% 41% NA 4.46 1.14 - Eturance Incluctlr 14."'" - - *Mt USA 35% I% -- I% 2% SI 33 42% 4% 4% 13.14 1614 1.3. 11% 61 Fry Incur Fntrcol Cpitret Iowa FAF WS) CO 41.418 5)12 SN; 10% 6% 01 35 00% 5% 11% NA 14.44 tic IS% 62 01514(4.0C WWII Caw: canna OM $1610 17113 41.116 $210 16% 14% 1% 03 43 - 1% 3% 144 14.14 SU - 63 Cwroth Fharcial ix Cua A renew WON 1.527 145 $2.646 1410 40% .38% N me/ sans,. cm 71% 1% 32 37 00% .1% .b• 144 4.4, 0.26 41% IA Sloarilittrairi. Stow Cap canto STC 41012 42.127 9902 SSA 36% KO% 2% SS 38 - 4% II% 144 LIA• 14. - LS Kitts% htutnrel1P352t. bc how. IIRTG . 11948 27/I4 $151 $11) 42% 3% . 3% 43 48 - - - NA 414 134 - RIP !slit/ IcreOwl butItInclalry 11441tEllelmodcw Tina (RIM - - $3210 MAI 9% -.I% - - I% 2% * WI OA I% I% 47. 77.4 2.1. 4% IS Nytnansp Cacao/ tlitrf WY $3356 37/33 515.842 $1035 .2% .14% N 703.1 twor 174 2% 46 38 39% 5% 32% 1173 Mk Lb 4% IT PArn WE Lola Canon( lc tlita PCL $11155 4609 17234 $415 0% 3% ON T(131 larcbl RE 6% 51 35 14% .1% 16% 21E 124. AN 6% 68 Anotan Hous1Roll Ciro A SinshIantawn MIN $15116 11W6 $1.312 5200 .14% .6% ON Asto%PasIsitCFA 21% 2% 41 45 — 29% 149 29E Sp 1.06 — IV Potttr Cconeticr Trettr POI 31625 4453 31421 373 45% .18% 2% 4 34 00% 9% -2% 1th 24.7, ?A -23% K. Stroto)tlowretRonSnIsfirt$.54(.1trrERSit SWAY 31505 2553 4976 514 -2% -2% I% SO 45 — 50% -151 10a1 3464 ON — II $4.0 84, With InwIeot SK/P1erEPEIT SOY 31632 WAS WS WA 1% -2% ON AdwirPatnt.CSA 23% 3% 51 30 ?A% — — 744 2/644 Us 3% 92 NurtotRN.CalaiRtooW 15%16.Fart RUT WI 117.50 91/17 VAG SIS 4% .1% 7% E 39 — — — 36.1x Nog tki — 93 AGE: Ototonc:Forenp/ SNE.Fac1( RUT IMF 11714 WM $550 114 A% .2% 11% M — SI% — — 11135 NA IAA 11% RNA WAN /.0449tmerl 8 DOntlintryt Reel Eslale Nanagarorl 8 DepWard — — $4312 22:14 11% 3% — — 16% 2% SI 42 42% 11% 20% 11(13 33.14 3* 4% E AWN /WISP URI Reel f fl y POttope PLOY 34338 &WO 34328 $58.8 17% 4% ON Attowkwbw.C4A I% 3% U 38 MO% 9% 45% 14(0 MIA 2.16 7% 56 54 .1” ClICl/5 Winter XE 317.58 23)15 31.510 SO -24% 4% IA 0) 30 MO% — -151 231.4a 705344 17. 0% 14 Tic, AGOG,. Ls/40V TRC 12311 3124 $511 $11) .13% -10% 2% 4 - - - - Oh NA 116 — 97 NOW *saws. Ix INa Era Swoop MAU $3867 4121 WI 529 33% 14% N 0sto%Paalsse.CFA .5% 4% 03 41 00% 3% 9% 4.7% DA 204 13% BS ;NNW Irc Tr/SAW Rs FM 313.9) 20,12 3415 135 -14% 14% *I 42 — 11% 46% NA *SA 06 — Seclor:Inka•340 Techmalegy — — /till $223 10% 3% A 40 LS I% 12% 1126 17.11 2.8. 4% Inlerrel Wows 6 Strelras Money InkmolSoltsvni II kakso — — SUM 317.3 WA 0% —— II% 3% 5? II 14% 14% 11% 1564 Mix 321 3% 14 24/w GaxeFOns A r.ww.flraws 2 SU 49 I4439 $3,303123 4 -14% 41% 38% )) 35 00% 43% 16%._ 744 131.14 I* — SOW* Incleilly: Wow _ — — $1.454 $353 21% It% _ — — — 54 3% SI Al 2.4% 9% 10% ISM 2134 4.7z 4% 133 FE We CorpoW RAW( Satce FICO WO 9363 12329 SISS 59% NM 4% 93 46 611 711 MI Inc nu 7.1. 5% Source: J.P. Morgan. Blomberg J.P.Morgan 8 EFTA01071296 Oubravko Lakos-Bujas (1-212) 622-3601 [email protected] Global Equity Strategy and Quantitative Research 13 August 2015 Macro Drivers: Demand, Supply, Affordability, Credit J.P.Morgan Housine Demand: firming on strong labor market (declining unemployment rate + rising wages), high consumer confidence, improving demographic trends (household formation), and low vacancy rates • The US economy has now entered its 371° month of >100k job creation. Since the start of the recovery (3Q09), the economy has created more than 11 million net jobs with the unemployment rate approaching 5%. • Wage inflation has a positive spill-over effect on consumer outlook and housing demand. The decline in the unemployment rate is likely to push real wage growth and fonvard expectations higher (Figure 16). Figure 15: 58 Straight Months of Job Creation Figure 16: Wage Inflation Now Beginning to Respond to Lower UE Since January 2008 BLS Employment Cost Index noce s 101.1 - The economy has added 3.7 milhan jobs 5M since the Man of the franclaterisis 0.1 4M al I .24 -4/4 EM -10M II III Combine enroll Change tk 3001. Monthly NoMann Payroll Change ' 030k 4% Ida - 4130k 230k Ok 400k 430k -100(B 0% 2038 2009 2)10 2011 2012 2013 2014 9315 Source: J.P. Morgan and BLS mu 2013 mu mis ECI Compensation Groat, &KAM 1204 Sense Miocene 2003 2004 2305 2008 2007 ELSMarar Hasly Earnings Groath 2008 2009 2010 2011 Source: J.P. Morgan. University of Whom. 6t.& and Bloomberg • Both University of Michigan Consumer Sentiment and Conference Board Consumer Confidence are confirming robust consumer sentiment—holding near best levels seen during this expansion. • Homeowner and rental vacancies are sharply lower. Due to the severity of the last recession and tighter credit compared to prior recoveries, rental vacancies rates have declined to the lowest levels since the mid-1980s. The homeowner vacancy rate declined to 1.8% from a peak of 2.9% as the excess foreclosure supply was initially absorbed by all-cash investors and more recently by first-time homebuyers. Figure 17: Consumer Sentiment and Confidence Strong Figure 18: Homeowner and Rental Vacancies Low Sentiment indicators encouraging Rental vacancies at lows not seen since 1985 120 12 - 10 Ikea !Vacancy 110 a nri; 100 A Rental Vacancy 2.5 • 93.1 90 \I 902 0 1%.let) L 20 ao Mchgan Consume. Sentiment 30 I C8Constmee Cenederce 20 2003 2004 2035 2003 2007 21308 2009 2010 2011 2)12 2013 2014 2015 Source: J.P. Morgan. Uniyersity &Whom. Conference Baird. and Bcomterg 6 10'91 92 `3314 95 ,3617 98'93 Source: J.P. lAcrgan and Census Bureau 9 EFTA01071297 Dubravko Lakos-Bujas (1-212) 622-3601 [email protected] Global Equity Strategy and Quantitative Research 13 August 2015 J.P.Morgan • Even prior to the Great Recession, the household formation trend was under pressure due to declining affordability. And after the start of the recession, this trend accelerated as the unemployment rate for 25-34 year olds surged to over 10%, Figure 20. • This resulted in a decline in headship rate with a rising percentage of 25-34 yr olds living at home with parents. As the memories of the last recession fade and the availability of jobs and rising wages improves overall confidence, this population group could be a significant driver of household formation. • Household formation remains significantly below the long-term trend with a current "deficit" of 5.2 million households. As noted by JPMorgan Economists (Rental demand continues to soar), the recent household formation trend has been more encouraging: "Household formation had been unusually weak through the first several years of the expansion, growing at only about 0.6% per year or half its pre-recession trend. But the number of households, measured as the number of occupied housing units, surged in 4Q 14 and has held a stronger trend through the latest reading. The number of households in 2Q14 was up 1.1% ar and I.4%oya." Figure 19: Headship Rate Down as Young Adults Live at Home Figure 20: Household Formation Below Trend Since 2005 25-34 yr olds Millions 20% 125 Total US Households 18% 18% 14% Lk* In Parents Household 12% 0440 10% 8% 47% .5 '91 16 16 17 18 19 110't'02D3Ili116 1:43 1)7 08 08 '10 11 '12 '13 14 15 19 *4 IS 14 /9 SI 19 11 59 14 1)9 14 Source: J.P. Morgan and BLS Source: J.P. Morgan and Census Bureau nag De Ion from trend !!!!!!!! Beloserend el formai= AhoveerendHHIonnodon • Demographics support an increase in housing demand over the next 15 years (2015-2030). A pick-up in younger cohort of the working age population (ages 25.49) as a percentage of total working population (ages 25.64) is projected by the UN, see Figure 21. We seem to be at an inflection point in housing demand since the younger cohort is more likely to drive housing formation. • Google Searches confirm similar improvement in housing trends. Based on keyword searches such as "Buying a Home", "Title Insurance", "Home Price" and "First Home", there has been a pick-up in interest for all things housing. Figure 21: Demographics Support Increased Housing Demand US population ages(25-49) I ages(25-64) projected to increase through 2030 —USPcpdalonagell25493hrsl25-54)* 74% 72% 70% 039% 86% 64% 62% CO% "§§"§§§§ilifIMA111111; Source: J.P. Morgan and UMW Nations Deparrnent of Economic and Socal Maks Figure 22: Google Searches Confirms Similar Trends in Housing yfy trend 2019 Source: J.P. Morgan and Gccgia Trends 2010 2011 2012 2013 2014 2015 10 EFTA01071298 Duhravko Lakos-Bujas (1-212)622-3601 [email protected] Global Equity Strategy and Quantitative Research 13 August 2015 J.P.Morgan Housine Sunnily: supportive with months of supply and starts/permit activity well below historical trend • Existing and New Homes for Salc and Months Supply rose for several years before peaking at 570k ('06) and 12.2 months ('09), respectively. Since the peak, however, the months supply has decreased sharply to levels seen prior to the housing boom. • New home sales lag existing home sales. Prior to 2006, new home and existing home sales grew in lockstep. However, during this recovery, homebuilders have continual to favor construction of larger homes over the $150-200k entry-level due to lower profitability of this segment. So far, this first-time buyer demand is being fulfilled by existing homes rather than new homes. Some homebuilders have responded to this demand, but due to costs (in particular land) the new home supply for entry-level housing is usually in the outskirts. Figure 23: Supply Has Tightened to Pre-Boom Levels Figure 24: Sales Recovering but New Home Sales Lagging Existing New single-family homes Single-family homes, millions 70CA - — 14 1.6 50Gt • • 12 1.4 7.0 Ensbng Home Sales 6.0 1.2 1.0 042/0 Hama le 400t far Sa Q`11) a 0.0 300k 6 0.6 COCA - 200k 4 0.4 2 0.2 100k • Ot 0 to SO*9112,339.116 93 97'95'999011 M113 W051)61/7 11611610 • 10 '9112 SPAS 9819*C0111/2 '031:11 06126 67 Vol '0? 10 1112131415 SOMA: J.P. Morgan. ROAN Assocaeon of Realtas and Census Bureau Source: J.P. Morgan. Mahood Asscciabco of Realtors and Census Bureau • Housing Starts and Permits have risen steadily during this recovery but the activity remains well off peak levels. However, the current housing starts remain well below long-term historical trends, especially if adjusted for growth in population or households. • During this recovery, multi-family starts have been more robust than single-family with the decline of home ownership rate. In fact, last month's strength was driven almost entirely by the multi-family segment which is currently expanding at the fastest rate at any time since 1990 while single-family starts/permits are well below historical levels. Figure 25: June Housing Starts Above Consensus... Figure 26: ...But Strength Driven by Multi-Family 000s. saar Dark = permits, light = starts 250CIt —r 2.0:0k ■ 1 1. 1A00k SlajeFanili 1. obi Housing Permits 1.200k 1.CCOk 90919293'91 95 93 97 99 99 90W 921k1 124 .05 *C6 1:13 '0910 1112'1314 IS 931112 93 W95 SG '97 10 '93'00 '011213314 65 YAW DO '0910 11'1213141S Source:J.P. Morgan end Census Bureau Sarce:J.P. Morgan and Census Bureau 11 EFTA01071299 Duhravko Lakos-Bujas (1-212) 622-3601 [email protected] Global Equity Strategy and Quantitative Research 13 August 2015 J.P.Morgan Housine Affordability: homes still affordable compared to long-term but rising home prices and higher interest rates over last two years is pushing affordability down. Strong job market and rising wages should continue to be a support. • The Homebuyer Affordability Index has declined for all and first-time buyers over the last two years due to rising home prices and higher mortgage rates, see Figure 27. It is worth noting, however, homes remain affordable when compared to long-tom historical trend. • We believe a continued improvement in job outlook and a meaningful pick-up in wage inflation could help stabilize and potentially reverse the recent home ownership trend, Figure 28. • As shown in Figure 28, the homeownership rate has declined from recent peak of 69.2% in 2004 to the lowest level since 1967 to only 63.4% in 2Q15 as households favor renting over owning. This decline has more than unwound the increases during last decade's housing boom and brought the homeownership rate to its lowest level since 1967. Figure 27: Homebuyer Affordability Index Light = monthly, dark = 1yr avg 0 90 91 92 939415 9 97 99 991011 132 Mgt WIG 97 TS to 10 11 12'13'1415 Source: J.P. /anal and National Associafice of Renters Figure 28: Home Ownership Rate Since 1965 70% Ea% 63% 67% 66% I 65% 60% 63% at% 1916 1970 1975 1900 1965 Scurce:J.P. Morgan and Census Bureau 1900 095 2000 2006 2010 MTh • Home price appreciation has leveled off since rising double-digit in 2013, but the recent —5% yly increases in both Case-Shiller and FHFA indices remains significantly above wage growth, see Figure 29. • The increase in the ratio of median existing home price to median household income since 2012 reflects the fact that home prices are rising faster than wages — a trend that is likely not sustainable over longer time period. This metric looks worse for new single-family home prices to household income, which is near an all-time high, see Figure 42. Figure 29: Housing Prices Showing an Upward, Albeit Slower Trend Figu e 30: Declining Affordability Since 2001 Existing home sales 20% 2504 15% 10% 5% 0% 40% .15 Case-Shiner 20-City Composite 2001 2002 2009 2000 2'305 2006 2007 2009 3309 2010 2011 2012 2019 2011 2015 Source: J.P. Morgan. S&Pitase-Shiler and FHFA War Home Price gay • away. Sack • fp my 1504 1001 t0 VI '02 93 be OS 013 97 138 119 10 11 12 13 II Scurce:J.P. Mow. Census &reau and Bbcoberg 15 5.00 450 2.00 12 EFTA01071300 Dubravko Lakos-Bujas (1-212) 622-3601 [email protected] Global Equity Strategy and Quantitative Research 13 August 2015 J.P.Morgan • When adjusted for inflation, home prices remain 20-25% below previous peak levels. The Case-Shiller 20-city is 26% below and FHFA HPI is 19% below last cycle peak in home prices. • Buying vs. Renting most attractive in last 15 years. The median price to median rent ratio has declined to an all- time low of 263, compared to peak multiple of 390 and average multiple of 329. Figure 31: Home Prices Remain Far Below Peak Levels Price decline even lower after adjusting for Inflation MAW 0% .71% .14.3% NOS HPI Case-Shun 20-City .203% .30% Source: J.P. Morgan. S&PiCareiShier ana FHFA Figure 32: Home Price-to-Rent Ratio Reflects Rental Bubble Median 400 $1,200 *Wan Prke to Medial Rem 360 W.. (111 SMOG 300 $1.051 250 NSWPM WOO 200 SAO 150 3700 100 so MOO 0 6400 '00 '01 12 13 04 16 16 17 19 19 0 'II 12 13 14 15 Source:J.P. Morgan. National Assojabon of Realtors and Camas Bureau • Affordability impacted by incremental rising mortgage rates. As shown in Figure 33, 30yr fixed home mortgage rates for conventional loans have risen roughly +50bps since 2012 to 3.90% while Jumbo rates have risen by roughly +39bp to 4.29%. Every 50bp increase in mortgage rates is equivalent to a 6% increase in home prices. • Despite the pick-up in mortgage rates over the last two years, the absolute levels remain low compared to long-term average and even compared to post-recession levels. • Historically, bear flatteners are not associated with negative performance for housing stocks. As shown in Figure 35, homebuilders have outperformed the market during bear flatteners. On the contrary, bear and bull steepeners carry worse implications for homebuilder performance. underlining the importance of long rates for the housing market. Figure 33: Fixed 30Yr Home Mortgage National Average Since 1999 90% • 8.0% 7.0% t0% SO% 40% 31% Source: J.P. Morgan and Baobab Figure 34: Rising Rates Not Necessarily a Negative for Housing Homebuilder performance during rate cycles since 1991 % Maths Avg. Ann. Ret Ann Stdev IR 'Bear Flatten& 31% 4% 23% 0.11 Bear Stepener 18% -12% 21% 4.50 BJI Flatter 22% 28% 23% 1.21 BIM SEepener 28% 4% 29% 4.21 Rising 10-Ye a• 51% -13% 25% -0.53 Felling 10-Year 49% 19% 24% 0.70 Rising Shut Rates 49% -2% 22% -0.09 Feting Short Rates 51% 9% 27% 0.33 SoJrc* P. hivgai ant 81ccenberg 13 EFTA01071301 Duhravko Lakos-Bujas (1-212) 622-3601 dubravko.lakos-hujasQpmorgan.com Global Equity Strategy and Quantitative Research 13 August 2015 J.P.Morgan Household Leverage and Credit Standards: households delevered balance sheets; banks easing credit standards • Household balance sheets at best levels in more than a decade. During this recovery, households leverage has continued to decline as % of disposable income and %of GDP, see Figure 35. Also, the debt service ratio (payments as % of disposable income) is at the lowest level and still declining, see Figure 36. • The sharp decline in household debt metric is likely due to declining homeownership rate, write-down of bad mortgages, and rising disposable income. Figure 35: Total Household Debt Low, Capacity for Higher Leverage Figure 36: Household Incomes Can Support Higher Debt Payments Total Debt as % of... Payments as % of Disposable Income low and declining 150% . td 115% - 100% • Ncosehold Debt as 'b ID%potae Income 41 Household Debtas %of GOP '90 91 92'93 9t'% 9317 '93 8011 82 1331111513517 13819 1011 '12 '13 14 15 Source: J.P. Morgan and elocenberg 6 lcUl ht( S. hketme Debt Seevke Retie . . . • • • . *90 81 12 13 1415 '93 '97 '93 le DO 1111293W 161117 88 1910 1112181115 Source: J.P. lAcrgan and Federal Reserve • Banks are easing credit with the senior loan officer survey indicating favorable trend in credit. As highlighted by J.P. Morgan Economics, the latest report showed that a larger share of firms cased lending standards over the past three months and firms reported stronger demand. • Lending standards should continue to improve with further decline in unemployment rate, higher wages, and low household leverage. Also worth noting, the mortgage refinancing cycle (4Q08-2Q13) is likely behind us with the Fed expected to begin raising rates sometime this year, see Figure 38. In this environment, banks are likely to increase focus on new mortgage originations, which should support the housing recovery. Figure 37: Easier Credit a Positive Banks reported 11% net easing 93% 93% AO% 30% 20% 10% 0% .10% 1)7 Easing 14 '09 10 11 12 '13 15 Net % et Banks Tightening he Prise Moehinies ih0 II,II! MBA Purchase indette I I I i ,1 rll ! I i - - • - • - • • - . . . . . . . . . . . . . . . . . . . . _ • - - - • _ - _ _ . . . . . . . . Source J.P. Morgan. MBA and Federal Reserve Figu e 38: Fed Liftoff a Concern for Mortgage Rates Blue shaded = rising rate cycles 1250 10% 1050 8% 79) 6% go 4% 2% 0% 90111213'9036'9317,3899'0011 0313C05138'07XIBW101112131415181718 Sauce: JP. Morgan. Federal Reserve and Freddie Mac CO. keitms Rae Ay 14 awe mew "" 1514 ..231c• *Ste Fiedit Myr commtment rate Fed F Fed Fwd. 14 EFTA01071302 Duhravko Lalcos-Bujas (1-212) 622-3601 [email protected] Global Equity Strategy and Quantitative Research 13 August 2015 J.P.Morgan Relative Valuation: as mentioned earlier, residential housing is one of the few investments remaining, which trades at an attractive valuation in our view. It trades at a discount to equities and Gold. However, a tepid rise in household incomes would likely keep new home prices from rising too sharply. • Relative to Equities, Homes more attractive. Currently, it takes 137 units of S&P 500 index to purchase a median priced home in the US, see Figure 39. This represents a 48% discount to its long-term median of 260. • Even after the recent decline in Gold, Homes are a cheaper hard-asset alternative. Even with the recent decline in Gold, homes remain a more attractive hard-asset than gold. It currently takes 240oz of gold to buy a median home compared to long-term median at 332oz. Figure 39: 137 Units of SW 500 to Purchase a Single-family Home Figure 40: 240 Ounces of Gold to Purchase a Single-family Home Long-term median: 260 units of S&P 500 Long-term median: 332 oz. gold 600 500 ! ! 700 1.0:0 BOO 400 coo T Homes Espana/ea 700 S&P 500 Cheap 600 500 300 LT won 260 400 200 300 137 300 100 100 j Hoosschno SIP 500 EANOSNO - • 2006 2011 1956 1971 1976 1961 1936 1991 1996 2001 Source: J.P. Morgan. Census Bureau and Bloomberg 1966 1971 W6 1961 1965 1991 1956 2001 2006 2011 Source: J P. Morgan. Census Bureau and Bbarberg 392 240 • Oil inching towards parity with Housing. With the recent decline in oil, it is becoming increasingly more attractive vs. housing, see Figure 41. However, housing is still a relative bargain given that it currently takes 4700 barrels of oil to buy a home vs. long-term median at 5,400, see Figure 41. • Risk to housing: tepid growth in household income. The S&P Case Shiller Home Price index has risen 34% from its low, while the median household income has only risen 5% since 2010. This divergence helps to explain new home purchase price to household income ratio rising back to near peak level of 5.4yrs compared to LT median of 4.0yrs. A significant pick-up in wage inflation could help push this metric lower or if more homebuilders decide to build more lower priced entry-level homes. Figure 41: 4,700 Barrels of Oil to Purchase a Single-family Home Long-term median: 5.400 barrels of oll 20a to 161 la Ia it Hones Expeosrat dl C'e* 6c4nes Clreso Oi E.7501'* 1905 1971 1976 MI 19.65 1991 1995 KO1 Source:J.P. Morgan. Census Bureau and Bloomberg 20:6 2011 Figure 42: New Single-family Home Price to Household Income/Yr Long-term median: 4.0 yrs of income 7 6 5 4 3 2 1 . 1966 1971 1976 iiu 1 IL ISM 1966 It Haws Euenshe nre .11N NixnesCneW name lign 5 LT Medan 4C 1991 1996 2001 20(6 2012 Source:J.P. Morgan. Census Bureau and Blomberg 15 EFTA01071303 Duhravko Lakos-Bujas (1-212) 622-3601 [email protected] Global Equity Strategy and Quantitative Research 13 August 2015 J.P.Morgan Commodity Prices: commodities linked to housing are rising. While we acknowledge most commodities are widely used outside of residential housing, a notable change in housing activity nonetheless should impact these commodities. We selected the following commodities to monitor the health of the housing market: lumber, gypsum, cement, and aggregates. • Though steel framing has become more popular recently, an overwhelming majority of new homes constructed continue to rely on lumber for the shell / skeleton. Lumber prices in the US have risen 9.5% above last cycle's peak. • Drywall installation generally occurs toward the end of home construction and thus lags housing starts and therefore demand for Gypsum is more closely aligned with housing completions. Gypsum prices made a new all-time high in February of this year, capping a 56% rally since crashing 32% in '06-07 Figure 43: Lumber PPI mo aro 1 1.! P L I I itallon-adj aro ti'• t : zso %A. `1. Q 4`,.. 310 150 100 60 0 65 70 75 10 15 Figure 44: Gypsum (principle component of drywall) PPI 350 A rl 303 Irk innatiabakyi 350 foe' i s" iv in : 210 V wigr 150 100 actual 60 0 10 IS 10 15 10 15 70 75 03 15 90 15 10 15 10 Source. J.P. Morgan, BLS anakomberg Source:J.P. Wigan. BLS anti Roomberg • Pouring a home's concrete foundation is one of the first steps taken in constructing a new home after site prep, grading and installation of basic utility footings. Concrete is a composite material prepared on-site from cement (10-15%), water (15-20%) and aggregates (60-75%). • Cement prices, which took six years to recover since pre-crisis highs, continue to move higher reflecting broad-based demand from global construction. The cost of aggregates, which never declined during the crisis (partially due to infrastructure related expenditures), continues to move higher with the pick-up in residential and non-residential construction. Figure 45: Cement PPI I Figure 46: Aggregates (crushed stone, rock and sand) PPI 350 300 • 250 • 200 • 150 • 100 • 60 actual 0 0 15 70 75 10 15 SO 15 tO OS 10 /5 70 75 10 15 90 SS 10 15 10 Source: J.P. lAorgan. BLS and ekombarg Source: J.P. Ragan. BLS and &embers 16 EFTA01071304 Oubravko Lakos-Bujas (1-212) 622-3601 dubravko.lakos-bujas©jpmorgan.com Global Equity Strategy and Quantitative Research 13 August 2015 Equity Fundamentals: Double-digit Earnings Growth J.P.Morgan Stronger Fundamentals for Housine Stocks: 5-6% revenue growth and margin expansion expected to drive double- digit earnings growth. Full-year estimates have been revised down, which is setting up beats for rest of the year. • Stronger sales and earnings growth: housing stocks on average offer stronger revenue growth in the coming quarters compared to low single-digit growth for S&P 500 (ex-energy). This coupled with margin expansion is expected to drive double-digit earnings growth in the upcoming quarters. Figure 47: Consensus Revenue Growth vs S&P 500 ex-Energy Figure 48: Consensus Earnings Growth vs S&P 500 ex-Energy Quarterly Growth Rate. yhr 14% Estuaries it—tbusrg Sixes —S&P SOO (ex-Energy) 1 Quarterly Growth Rate. y/y 50% - 40% - 10% 30% - a% 20% - D 6% CP 6% at ma at ell. 10% . "S "I r .. a -... ,...— . -.0 .., 4% 0%• • 0% 3/11 9411 3512 Source J.P. Morgan. Factest 9112 3113 9.113 3714 WA 1,15 9115 10% -20% • 3111 9111 3112 9112 3513 9113 3114 9:14 3:15 915 Source:J.P. Wow. Factet ssrretey-O—Hou Stocks —S&P 500 (ex-Energy) 4 at t. at "a • t c c ag a A "-et '0 • Significant margin expansion: the Street is expecting significant expansion for companies linked to housing with net income margins expected to increase from 6.4% (last four quarters) to 7.1% over the next four quarters (3Q15-2Q16). Based on estimates, margin expansion is expected to be driven by declining raw material prices while selling and administration expenses am expected to rise slightly in comparison, see Figure 50. Figure 49: Net Income Margin Quarterly 14.0% 12.0% MO% --...---r-- ------'--- P --- R ---- it ,, -- — - - el at g ci at ,.: N at G 8.0% IC ae ae «It r • I... &re at e ae -a ,. u:ke C a_..': ...0 'A tet 4° 'Ai • -o- d 6.0% e to — ---- .., q . ea.; vl 4.0% or Emmaus 2.0% • —0— Housing Stooks — S&P 500 (ex-Energy) Figure 50: Net Income Margin Drivers S&P 500 INA Other OSA SOU COGS 0.0% 3/11 9/11 3112 9112 Source: J.P. Morgan NC Census Berea. 3113 9/13 3/14 9114 3/15 9/15 Source: J.P. Morgan. FactSel 4 sHousing Skein 17 EFTA01071305 so Dubravko Lakos-Bujas (1-212) 622-3601 [email protected] Global Equity Strategy and Quantitative Research 13 August 2015 J.P.Morgan • 2015 earnings revised down by 5% over last six months: As shown in Figure 52, the Street has sharply revised down 2015 estimates over the last six months. This is likely setting up easy beats for rest of the year as residential investment picks up in the coming quarters. Figure 51: 202015 Earnings Revisions, Last 6 Months Figure 52: 2015 Earnings Revisions, Last 6 Months Housing Stocks 110 Honing Blocks.R2 1/28 2/27 329 423 528 627 7/27 Housing Stocks 105 103 - e 101 1 89 97 95 ; 93 a a 3 89 - 87 85 128 227 329 4,03 528 627 727 waif Source: J.P. Morgan. Factsel Source: J.P. Morgan. Faclsel • Sharp earnings beats seen in 2Q15 likely to continue into YE. 70% of companies in the housing composite beat on the bottom-line with an earnings surprise of +7.7% but the quality of beats was poor with more companies missing than beating on the top-line. Figure 53: % of Companies Beating on Revenue and Earnings Housing Stocks 60% 3 • 60% 3 • 40% 20% 47 48 56% 46% — 40% 201430144014 0152015 Revenues Source: J.P. Morgan. Factsel 70% 201430144014 0152015 Earnings Figure 54: % Revenue and Earnings Surprises Housing Stocks 12.0% 9.0% 6.0% EL 3.0% at 00% .3.0% .6.0% 1.3% 0.1% 43.6% 43.81.° -1.5% -1.3% -1.5% -3.0% 7.7% 20143014401410152015 20143014401410152015 Revenues Earnings Scarce: J.P. Morgan. Factsel • Strongest growth seen by housing stocks within Industrials and Discretionary. Similar to S&P 500 sectors, the strongest surprises were delivered by housing-related Financials. Figure 55: Earnings Report - Housing Stocks 202015 i% Surprise... % of Companies Beating... 201SEUended &oath Pike Performance Ran. Earnings Revenue Earnings Reponed • Est Bottom-up .1 Cos Rep Taal CO3 % of Cos Rep Sales Earnings Growth Growth 0.61/ (Yen Avg Avg Avg Avg host oast (Lag neu 405) 2015 40s) 2015 405) 2015 40si 2015 Saes Earnings Sn:e SDay % Garth Growth sold Alter- (Val (Ye?) swite Reperang Housing Stocks 82 10) 82% 58% 14.0% 0.0% -15% -12% 72% 49% 40% 53% 70% St% 11.3% 1.4% -0.2% Mamas 12 14 86% 3.0% 11.7% 43% 48% -14% -2% 37% 25% 44% 33% 25% 10.6% .C8N 45% Inistak 22 26 85% -LS% 19.9% -1.3% -2.5% -16% 10% 35% 36% 49% 81% 18.5% 4 7% 14% DISCteknes7 26 31 76% 14.0% 25.4% 0.6% 01% 1.1% 8% 57% 42% 55% 70% 7.7% 13A% 26),, Finance 23 23 87% 29% -5.5% 0.1% -1.1% -104% 15% 57% 50% 63% 75% 29% -5.5% .35% -3,1% Source: J.P. Morga . Factsel 18 EFTA01071306 Dubravko Lakos-Bujas (1-212) 622-3601 [email protected] Global Equity Strategy and Quantitative Research 13 August 2015 J.P.Morgan • Strongest Consensus Earnings Growth by Company: the figures below show next twelve months earnings growth for housing stocks, sorted from strongest to weakest. About a quarter of the housing names are expected to deliver >30% earnings growth. Figure 56: Strongest WY Earnings Growth (Next Twelve Months) Sort Highest to Lowest Figure 57: Weakest Y/Y Earnings Growth (Next Twelve Months) Sort Highest to Lowest My Gem Hddires be 935% _v 20% Meg on PLC Haubsters bc 242% I 10% Tel Brothers Inc New Home Co IndRie _229% I 19% Home Depot kW% Bakers FreiSource mc 139% I 10% Aeon's Inc Bearer Homes USA be j 138% I 19% Masco Corp Mein Lyon Haves 121% I 18% PolyCine Corp Century Communities Inc 94% I 18% Pkrn Creek Timber Co Inc Hornanen Erreanses Inc 81% I 18% Seamen Manulacbreg Co Inc TRI Po/me Group bc 18% I 18% Ryland Cox( edge kWh Maeda Weals Inc 76% 18% WIllans-Sonome re HOC Holdings Inc 73% ihoncd Woddwoe de 72% 17% Web» Inc KB Hans 71% 17% Leona Corp 101 ~we Inc 66% 16% Leggsti 8 Rat Ire Saesart Inbrmata Senecas C 54% 16% Boggs 8 Seaton Cap 15% Caesarbone SØ-Yam Ltd Beacon Hooke Supply lx 50% 15% Not093n Corp Resloracn Hardare Hobres 48% 15% Pool Corp Gaon Corp 48% 1.81 ~Ire 47% 15% Hearty Ferran Cos Inc 14% First Republc BenbtA Forester Group bc 46% 13% Valsper Carr% Realcgy Holångs Corp 45% 12% HSN Inc HcmeStbe bc 41% 12% Scone MadeGro Cabe Zikr4 GroL9 tic ~M 41% 11% Rrst hearken Financel Cap Far Isaac Corp Je.~ 37% 10% RPM Imainseonal Inc 9.adard Nxr6c Corp 35% 10% Stanley Black 8 Deck/ Inc " Yc)0~1 3.5% Eagle ktateseis be 1~ sa% 8% Auretrang Wald Irdusbes Inc 8% Watts Water Techndogies Inc Weyerhaeuser Co JOEM 32% Mabee Hemet Corp 32% 7% PubeGroup Inc Arnadcan Woodmark Corp 1% Boise Cas:ade Co 6% Bed Bath &Before Ire Lore's Cos mcJ~il 31% 7 6% MG1C inresiment Corp Lennox intemetknal .p~. 31% WO Communities Inc I~ 30% - 4% RET~HceInge Inc 3% CadRepublic Inarnabonal Cor USG Corp 20% Omens Comng 28% 3% Wager 80srlap Inc Future Brands Herne d Security r~ 27% Grace Inc AU SmithCorp 1~1 26% -2% Pena:heard Wheenol Corp 26% -6% t Tailor kbrrson Home Cap Eden Men Mews Inc 1~ 25% -10% Wes!~ °embed Cap DR Hotta, Inc ir 25% Rattan Group Inc Shenvel-Wesms Ca% 1= 25% -TN American Homes 4 Rent tai-Boy tic j — 23% -08% SI Joe Colhe Whale Indus:des re 23% —146% Lcusare-PactIc Corp Unhand Forest Products Inc 22% -214% k Tres Co inc 21% 430% Germain firehoa tic Slarwood Vispolni Residential Source: J.P. Morganand FactSel Source:J.P. Wigan and FactS« 19 EFTA01071307 Dubravko Lakos-Bujas (1-212) 622-3601 [email protected] Global Equity Strategy and Quantitative Research 13 August 2015 J.P.Morgan Characteristics of Stocks Levered to Housinp: in this section of the report, we compare the financial metrics of housing stocks to S&P 1500. Generally, stocks levered to housing have higher growth with riskier attributes: • Similar valuation but stronger expected growth: on average housing stocks trade at a similar EV/EBITDA and PIE (NTM) multiples but have a higher growth profile on average. Housing companies have significantly higher sales and EPS growth of +6.8% and +18% (vs. +1.5% and +11% for S&P 1500). Figure 58: Median for Housing •Hwang VALUATION: EVIEBITDA and PIE Figure S8P 1500 Median otusii 59: GROWTH: Sales and Earnings Growth vs S&P 1500 171% Stocks vs =S4P1500 for Housing Stocks INF 1510 14.0 25.0 7.0% 180% 12.7 180% 121 CA% 101 1 8.4 W1 200 14.0% 10.0 5.0%- 102% 121% 15.0 to 4.0% - 10.0% to lb% BD% 10.0 8014 4.0 20% 1.51 51 40% 2.0 1.0% 2D% 0.0 OD 0.0% OD% WW81191141.711) P.E ATI( Win treat VA WS Wow& tyti) Source: J.P. Morgan ad Facbast Scurce: J.P. !organ ad Factaet • Size: similar in market-cap though smaller in profits. Housing stocks are similar in size to S&P 1500 names ($3.9b median market cap vs. 54.26 median market cap for S&P 1500) but generate lower net income ($87m vs. $135m). • Leverage: higher financial leverage with a median total debt to equity ratio of 0.72x vs. 0.54x for S&P 1500 and lower interest coverage ratio of 5.9x vs. 9.0x. Figure 60: SIZE: Market Cap and Net Income Median for Housing Stocks vs S&P 1500 Wiwsiv 54.5 34.0 $8.5 510 325 310 31.5 31.0 3115 50.0 lkirtat Cap (18) Pin Income (48) Source: J.P. Morgan ad Fadset SSP 1500 54.16 53.87 • 5155 1 Figure 61: LEVERAGE: Debt/Equity and Int Coverage Median lor Housing Stocks vs S&P 1500 NH:wing - SSP 1500 5160 0.90 20.0 5140 0.80 6.72 18.0 5120 0.70 18.0 018 SIOD 0.34 141 121 0.50 SW en 10.0 0.00 SW to 0.30 51 to 340 020 to $20 0.10 2.0 so ooe 0.0 Taal Dtk4 to Equity Interest Cower Ride Source: J.P. Morgan ani Factset 20 EFTA01071308 Duhravko Lakos-Bujas (1-212) 622-3601 [email protected] Global Equity Strategy and Quantitative Research 13 August 2015 J.P.Morgan • Liquidity: similar cash balance but cash flow yield lower. Housing companies on average hold 7.4% cash as % of market (similar to S&P 1500 companies) and a generate lower cash flow as % of market cap (2.8% vs. 4.4%). • Cash usage: lower capex requirement and lower dividend yield. Housing companies have a lower capex requirement at 1.8% of sales compared to S&P 1500 at 3.2%. Dividend yield on average is also lower at 1.4% vs 2.0%, for S&P 1500. Figure Median • Hasic 12.0% 10.0% 62: LIQUIDITY: Cash and Cash Flow 1500 Figure Median • 9.0% 4.5% U% 4.0%. 63: CASH USAGE: Capex and Dividends 1500 3.0% 25% for Housing Stocks vs S&P • SIP 1500 for Housing Stocks vs S&P Hawing • SIP 15D) 7.0% 3.5% 3.2% 117% 10% 7.4% 7A% 6.0% 3.0% 20% 10% 44% 51% 25% 143% IS% 4.0% 20% - 11% 4.0% it% 10% 15% - 1.0% 20% 1.0% . 2.0% 05% 1.0% 05%. 01% 0.0% 0.0% 0.0% Cash as % an111Cap Source: J.P. Morgan aid Factse4 as % al Mit Cap Capes as% a/Seas Source: J.P. M3rgsn ard Parise' Ohldead Yield • Surprisingly, higher return on investment and similar volatility. Housing stocks generate stronger return on investment (on both ROA and ROE) than S&P 1500 companies. More surprisingly, however, the risk profile is similar as measured by both beta and annualized volatility for an average housing stock vs. S&P 1500. Figure 64: PROFITABILITY: ROA and ROE Median for Housing Stocks vs S&P 1500 Otaske .W1500 7.0% 10% 5.0% 10% 30% 20% ID% OA% WA Source: J.P. Morgan aid Factse 13% ni Figure 65: RISK: Beta and Volatility Median for Housing Stocks vs S&P 1500 20.0% 12 1.0 15.0% •Hateirq • UP 1500 0.87 0.99 212% 24.6% 300% 250% 121% as 200% 10.0% 01 150% OA 100% 5.0% 02 0 00 Nal 50% 00% 0.06 Bala Source J.P. Morgan at Factsei Annualised Volatility 21 EFTA01071309 Dubravko Lakos-Bujas (1-212) 622-3601 [email protected] Global Equity Strategy and Quantitative Research 13 August 2015 J.P.Morgan • Sentiment: on average, housing names have higher short interest as compared to the rest of the market and the Street is less constructive on the target price upside — the median consensus target price upside is 10% compared to 12% for the rest of the market. Figure 66: SENTIMENT: Short Interest as % of Total Float, Days Short Median for Housing Stocks vs S&P 1500 401i:using SOP 150) 10% 9% 8% 7% 6% 5% 0% 3% 2% 1% 0% 48% 2.5% Short Newt Figure 67: SENTIMENT: Average Analyst Stock Rating, Consensus Target Price as % of Current Price Median for Housing Stocks vs SW 1500. 1 = Strong Buy. 4 = Underperlorm 10 • Housieg SOP 1500 9 10 20% a 18% 2.5 - 7 16% 4,1 6 2.0 5 1.54 159 10.0\ 111% 14% 12% 1.5 10% 3 8% 1.0 2 6% 0.5 4% 0 2% SNP Days 0.0 0% Source: J.P. Morgan and Fastest Avenge Rating Source:J.P. Morgan and Pease Upside Shareholder yield near 5% for Housing Stocks. Perhaps due to the uneven growth and highly cyclical nature of most companies levered to housing, the shareholder yield has been quite volatile over the last few years. Over the last twelve months, the total shareholder yield increased to 4.7%, which is now higher than the S&P 500 at 4.1%. • As shown below, housing companies have been inconsistent with buybacks with net buyback yield in the range of -0.1 (2008) to 3.6% (2011) of market cap. However, the dividend payout has been more consistent and rising. Figure 68: Corporate Activity (Share Issuance and Repurchases) Housing Stocks Housing Stocks 2033 260 3363 2011 2712 2013 2014 202014 302014 40314 Kam 202015 LTV Nees Sloe* EuMatis 52,671 $1.785 57.985 $11.122 $12.778 NAN $19.791 $5.434 $1783 $4.305 $5.337 $4.311 $19,778 Lest Eat, k19.0nOt 2.717 2061 1603 1.413 63W 11173 3035 828 793 374 EEO 373 2.202 NetBuybacks 446 4279 $2278 $9933 $6074 $3.015 $16986 149C6 $1,985 $3992 $1930 13..959 $17376 Nel &Ow% Weld 0.0% 41% 18% 106 1.6% 7.6% 29% 19% /.094 17% 0.1% 0.7% 11% CaNDtexUnd Pad $5391 UM $5.771 $5.705 $6,841 $1431 $7,795 51265 $2099 $2101 $2.763 NI% NCO Tote Nei 8serbaces • D &side $5548 $3.957 $1019 $15,338 $12915 $14.449 NINO $6472 $7.054 25.993 57,393 93355 226,625 Yew Shareholder Yield 13% 1.8% 10% 11% 14% 20% 4.3% 1.3% 1.4% 1.1% 1.2% 1.1% 4.7% Nel Wirt 45,522 $1,944 59.875 $12939 $16033 534190 $25.910 $7,925 $6802 $6.005 $5.576 $7.511 $26,025 %Mend Payed as % dNel hone -101% 218% 55% 45% 41% 27% 30% 24% 31% 33% 49% 3% 35% Buybacks ea % &Netlrctme 48% 974 80% 44% 77% 75% 76% 69% 85% 73% 93% 55% 76% Taal Payout as % el Net Income Can fon tun lkeraso•s $15915 216988 $20.%3 $21.826 Se‘327 $35116 $40.037 $11,240 $10320 $9425 % $108% $40,017 ess CaPeA $10,639 $6.202 56533 $8.253 51191 $1401 $10.455 $22.X0 $2459 $3327 51.240 $2415 $11644 Actisid CFO $5,276 $10746 $14415 $13,572 5181E saris $29333 $8,937 $7.920 $5893 57.9.6 5349? $29,373 Total Payout n cti ol Cash Flow 106% 37% 93% 113% 71% 58% 83% 72% N% 152% 104% 73% 91% &Lae. J.P./Accgan aid Facaet 22 EFTA01071310 Dubravko Lakos-Bujas (1-212) 622-3601 [email protected] Global Equity Strategy and Quantitative Research 13 August 2015 J.P.Morgan Valuation: housing stocks trade richer on trailing multiples but at a discount on forward and book multiples • Based on median PIE (LTNI), housing stocks trade at a premium to S&P 1500 but trade at a discount on forward next twelve months multiple. Based on forward multiples, housing stocks trade at more than Ix discount compared to the market. As historical and forward multiples converge, this could be a source of upside for housing stocks. Figure 69: Price to Earnings (LTM) Median 30.04 24.1. na. — HousiloCompzele Mesh° Carocele average - SIP 1500 SIP 151:0 mop 'CO 91 92 '03 Si 05 t6 '07 tl0 90 10 11 12 '13 14 15 Source J.P. Morgan. FacCet Figure 70: Price to Earnings (NTM) Median 25.04 20.04 15.04 lot Sat 1.0 DI D2 93 Ds Source J.P. Morgan. FactSel VS 95 '07 VB 130 10 11 12 '13 14 'Is • Housing stocks on EV/EBITDA (LTM) trade at a premium: Due to significantly higher expected growth, housing stocks on EV/EBITDA trade at a premium to S&P 1500 companies. • On a book value basis, housing stocks trade at a discount to the market but inline with its 15y r average. Figure 71: EV/EBITDA Median 15.0a 10.04 tat 0.04 'CO 131 92 '03 bi DS 116 '07 'OS 11,3 10 11 2 13 14 15 Source J.P. Morgan. FacrSet — Hating Congo& Hating Canes& tarp, — SIP 1530 SIP 1500 atop Figure 72: Price to Book Median sac MIA 4.04 am 104 1.04 0.04 TO VI 22 CS SA VS 05 '07 00 139 10 '11 12 13 14 15 Source J.P. Megan. FactSel 1 - Wang Co-posse Housing Co-9crste average - SIP 1500 S&P MOO Image 14, 2 la 23 EFTA01071311 Dubravko Lakos-Bujas (1-212) 622-3601 [email protected] Global Equity Strategy and Quantitative Research 13 August 2015 J.P.Morgan J.P. Morgan US Housing Basket — JPAMHOUS <Index> Housing market fundamentals remain constructive with a pick-up in demand, tightening supply, high affordability, low household leverage, and easing credit standards. After more than six years into this recovery, we believe there are few opportunities that offer stronger growth and cheaper valuation than housing, and recommend investors overweight stocks and industries that are exposed to it. The J.P. Morgan US Housing Basket is composed of a diversified portfolio of companies that have direct or indirect exposure to the US housing market and should benefit from the continued pick-up in residential investment. Basket constituents are screened for liquidity (trade at least $10M ADV), and include direct beneficiaries of housing (e.g., Homebuilders, Building Products) as well as derivative industry plays (e.g., Durables, Retail, Financials). The basket contains 65 names, and the weights are optimized to replicate as closely as possible an equal- weighted basket, subject to a maximum of 10% of ADV traded in any single name within a $100M basket. The basket can be accessed on Bloomberg via ticker JPAMHOUS <Index>. Figure 73: Composition of the J.P. Morgan US Housing Basket — JPAMHOUS <Index>. as of Aug 12th 2015 . 120% 13 39 3fn s a,T :tav us 3r 4113 MX MZRAIR 9040% Ono'. IAN 410 591 9 40 41% .274% III if 24% in 14.0P.R0:444.11€ Cre• oh 19% 00 6.17 * 14% 42% 4 It 114 7.1 34% 101 901131.1.0CLIA Ono* ISM NM 397 16 11% IT 313% III Si 43% 5 90399 MIS 94.0.4 19% 231, 7 21.40 % .00 41% 11)% Its 121 34% Wd 6.4/ IA 03 94404 19% EEO 6.161 )2 .43.4 43% 44% 111 47 41% 4.11 Auks cat, 134401 ors 00 in .20% 091 In 40 34% OP 1404.6.102011).$ 000310 Wan 19% 110 4314 * 74% 40% IIS 40 29. v9I 101110/4142770 C0140019419411 19% 0211 1195 127 al% SO% 10% 212 27 in AV PV47091691C Cearalentlilm/4 123% as in a 141% la 831% 174 143 341 A 804210139140 69014011 9099 19% 1139 210 X 41% .13% 2:22% III bi 494 MC 40.119.9.6X93 14014•6046.44 151% Ma in is an 44% It I% 143 23 14% IC 40111.930490314 94:2180305 131% 4315 7m 9 1.2% 112% 711% III 14 241 09 .14/40004P eageows 19% 2919 014) 114 04% 174% 411% 09 611 In J aniac art 130 ton neon is% 1320 WI 0 04% ma 04% III MA 32% 413 Aut.comc tun" Infra 1313 5107 IMO * 491 22% 343% 163 ill% 334 as 0199, 12 0 0.818 (40101004 19% 6119 013 9 4.11 0% HS% III 43 294 L Leccav 00•61•54s 151% MO 410 0 17.4% WM lit% 162 4I 32% X 04414 00400 Emery 01004 19% 402 4.119 71 In *It 141% III 74 43% M74 C4410909 109 901 *an 19% ft* I34) 21 434% 424% 13% 02 Si 46% st4 nanwn4 saix 14441%orm irk 2734 In a on In ris no 43 33% :001 1401.10 7.1106 94014”404 112% OS 1512 4 4% .35% 91% 219 30 In Tat ma co as 0.1010•14S IR% 7112 1224 DI 410 I1D% as 0 43% sat non neva run nen. 1174100 in us in • 10% ma nu% Ho 133 124 ••• 100104124247 la% 7439 404 a 40% .1•1 114 55 501 11407•47 3 CIOZOLIC 130 027 4112 a 50 42% us II 3% INS sway Ina s Venn 130 10400 1601 IN ANL In. 244% us so 32% MO MOICO WC f12990954%142 CMS* 19% 0150 414) 27 44% AI% 42)% 223 0 26% 1401 9ACCI%1109905 1910744.09441110159 ors 397 074 2i 112% K2% 241% 213 s i 334 14 0190 070.100 0•30100010. 19% 4410 UM 24 40 7% 2151 MI 11 4518 Si LEW* 0994 1.60444$9010 19% II a 10.10 01 49.1 *VI 411% III 21 4094 Tft rataunitts ininisomen in 3443 5937 II oat in 711% 145 II 41% 391 11,“(0604.014C Itmes$ Patin 19% 210 7.199 III Ori 7% 115% III 16 In V.I. 1/4...19011106 1.6006$9011.5 19% M30 1519 in 64.1 13% 65114, 175 1) in 139 Stlatale Ha C 119•0003,9144 130 40 3434 9 .01 52% 123% 116 IA Vte EC KI.06415IC /0106$90193 19% 2952 10) 13 41% 744 11141 III 12 44% 94 LAMM% NC ilbsPal104.6144 13T1. 9/6 Ka NI ST an 453% III 20 51% 494 01409 rbanif Den. IAN ISM 1434 41 411 11% 44% 03 II 494 601114“ <41(SC 1404441,C,ntin IR% 420 1511 a 0.8% .I2% 041 110 IA 274 rim re PONT4 CROLP Peon, 0.4084 IAN 140 239 9 .45% 18% III% II IA 431 IMIIIC 0000:1000.4 IAN 14115 110 • 591 III% MI% 140 48 33% MA /640.60:1.9,0 Ann, 0,44.9 19% 0170 WM 1% 4% 41% an 10 27 54% 40 1.11•4401417.477 (tare Cknrin 13T1. 4113 6133 0 40 311 448% 93 II 411 400t 10:7(017 (14441.1 19% 016 506 %47% 242% 111 It 7 31% 06 . .629: reeve I tab, Roar In 610 UM 0 .1 414% 2% 261% III SII 341 .04 LOC/ C0.04 4.41 .414 13T1. NW 6439 375 211 494 40% In 44 en 0 0:44 :MT 9: k4,46 h(44 19% ION 152.91 444 4.% 01, III% 115 111 44% MA /ALL4207:WA9 12.11•+14 13T1. 8512 730 0 3.4% an 323% a7 47 32% 90 8401101403,00 -4.11•+14 13T1. 6111 10133 4314 214 III 42 724 49 41804.4104 .00 94...0 199 19% *0 1.10 * lit IN% tilt 214 55 lit 044 4.4.40074 .44.41 1» 4 13T1. Ins 2436 71 In In 444% us 2.4 31% on Rau ammo 1.0 13n. est 4243 0 40 In 343% 172 II 34% 470 VW 44•0227 2205 04000 0 0 19% 1112 5526 % 4). In II" III 10 42% ow won ncte SC Ti,s 0.03430.944 in um ant 0 44% 52% 332% us IA It% 10 MOIR 601.1909 11/1138110)008W0 016% 2402 14) * .11.0% 52% 61" III 70 43% 0•41 (0009.9 1010 Pawn 19% 527 WI 41 404% 35.6% 493% Ai 02 II% In I 407 4249x0 I Imam IR% 4126 430 a 30 an 5194 142 II La WI 0.0 41.13.1011. V.sone 19% 1110 Oa 21 In II% 214% 97 LI .12.4 CO 4.0n.OE WIWI 44/404 IP% 110 656 II 4230 .51% UM 61 2) Ma 0 htYCPWC.C57103 Pat bes.I.44ret 11n INN 340 A= .32% 43% III 18 411 Kt 47.10 00.1)454 144 (1.40.09•ITIA14 19% 406 7.09 3 16% 44% In II) 47 In .04 AMMON x:403 A At4 000.00504.43 19% 1516 110 21 42% .51% at 70 4.1% *IV 13/497/r4419.43 Pa. 104 V /PM A DNS IAN AIM 63:11 0 .5111 42% In 716 28 33% iLtC1/40J1.14. 7•04:000424.04 IR% 740 701 .2704 CS% 611 IA 43% M.) 4244 AOC X* £41.0 10% Mt 2)OT V. 4% 151. 611% III 7(I 474 10200111 110110•40494 0% 01 414% 143 /I in Ml $4511019146 591 4,1% 111% III 25 1% Source:J.P. Now Sea? Derrawes Strategy. Blomberg. NOW CO ooncovered companies: This basket has been aeated to leverage the thereof ihs researce report t exlufes companies that w not covered by J.P. Morgan Research and should not be ‘ievfed as a recommendation wet reseed to Mese °movies. 24 EFTA01071312 Duhravko Lalcos-Bujas (1-212) 622-3601 [email protected] Global Equity Strategy and Quantitative Research 13 August 2015 J.P.Morgan Basket Performance In this section, we examine the hypothetical performance of the J.P. Morgan US Housing Basket over the last three years'. The basket — JPAMHOUS <Index> — would have returned +18% on an annualized basis, narrowly outperforming the S&P Homebuilders Select Industry Index (SPSIHOTR Index), which returned +17.7% over the same period. The correlation of the basket to the SPSIHOTR Index is 93%, and the recent 6M realized volatility of the basket is 12.5% (the realized volatility of the SPSIHOTR Index over the same time frame is 1.5 vol points higher at 14.1%). The figures below show the performance and volatility of the J.P. Morgan US Housing Basket vs. that of the SPSIHOTR Index. The historical beta and correlation between them is also shown in the charts below. Figure 74: Hypothetical performance of JPAMHOUS and SPSIHOTR Figure 75: Daily Returns of JPAMHOUS vs. SPSIHOTR 200 180 160 140 120 100 80 An.12 Dec-I2 AprI3 Aug-13 Devil Ape-I4 Aug-I4 Doc-I4 App41 MOS -JPAMHOUS -SPSIHOTR Source: J.P. Morgan Eqsty . Deanne& Strategy. Bloomberg. Note: Al price perfonnance excludes oximnissmns and fees. Past perkrmance is not indanve of fuse returns 10% 8% 4:4:. 6% Ole R3 = 89% 2% CC 0% &I 6. -2% -4% A -6% -8% -10% -8 /6 -6% -4% -2% 0% 2% 4% 6% 8% S&P Honiebullders Select Industry Index Daily Return (%) Source: J.P. Morgan Equity Derivatives Strategy. Romnterg. Noe: NI price perbrmance es:axles comrrissiors and fees. Past rerformanee is not indtratina of future returns Figure 76: 6M Realized Volatility of JPAMHOUS vs. SPSIHOTR Figure 77: 6M Beta and 6M Correlation of JPAMHOUS vs. SPSIHOTR 26% 24% 22% 20% 18% 16% 14% 12% 10% 8% Dec-13 Apr-14 Aug-14 Dec-14 Apr-15 Aug-13 —JPAMHOUS 6M Realized Vol. —SPSIHOTR 6N1 Realized Vol. Aug-15 100% 1.0 0 0 0 20% ••• ••••••••••11.4 —6M Corral. With SPSIHOTR(Left) —6M Beta vs. SPSIHOTR(Right) 0.9 0.8 0.7 0% 0.6 Aug-I3 Dec-13 Apr-14 Aug-14 Dec-14 Apr-15 Aug-I5 Soiree: J.P. Morgan Equity Derivatives Strategy Sheinberg. Note: NI pm* performance Source: J.P. Morgan Equity Dernaaves Strategy. Blomberg. Note: Al price rerkrmance exci.des CCOIMISSICOS and Less. Past performance is not indicative of fubse felons eaduciasoommissions and fees Past performance is not inclusive of fosse returns Not all stocks in the basket have 3 years of price history (BCC, ALLE, TPH, RH, HRTG, AMH, and RLGY). In such cases, we have replaced the stock with an equivalent quantity of cash prior to its listing for the purpose of the back-test. 25 EFTA01071313 Dubravko Lakos-Bujas (1-212) 622-3601 [email protected] Global Equity Strategy and Quantitative Research 13 August 2015 J.P.Morgan Additional Basket Methodology Information In order to keep the basket relevant to the investment theme, J.P. Morgan reserves the right to review the following at any time: • Basket methodology. This is to ensure the rules of the basket remain relevant following any structural changes to the theme. This may include ensuring that the sector exposure of the basket remains broadly consistent with the investment theme. • Basket change implementation. J.P. Morgan will consider extending the implementation of changes to the basket composition from one trading session to any period up to five trading sessions in the event that a material increase in the liquidity or capacity of the basket is required to minimize market impact. Corporate actions may affect the JPAMHOUS basket. The composition of a custom basket is typically adjusted in the following manner: • Cash Merger. The divisor is adjusted and we remove the merging company from the basket on the day of merger and redistribute gains into remaining companies according to recalculated market cap weights of surviving constituents in the basket. • Stock Merger. If the acquirer is a member of the basket, then the weight allocated to the acquired will transfer to the surviving entity on the close of the last day it trades. If the acquirer is not a part of the basket, then proceeds (losses) from the acquired company will be redistributed to the surviving basket constituents based on the recalculated weighting on the close of its last trading day. • Spinoffs. The spinoff company and parent will be included in the basket and both the spinoff and parent company weights will be readjusted according to new market capitalizations after the spinoff date. • Tender Offers & Share Buybacks. The company remains in the basket and its weight is adjusted according to the impact the tender/buyback has on the stock's market value. • Delistingfinsolvency/Bankruptcy. The company is removed from the basket as of the close of the last trading day, and the proceeds (losses) will be redistributed into remaining companies according to re-calculated weights of remaining companies in the basket. If a stock trades on "pink sheets" it will not be included in the basket. 26 EFTA01071314 Oubravko Lakos-Bujas (1-212) 622-3601 dubravko.lakos-bujas©jpmorgan.com Global Equity Strategy and Quantitative Research 13 August 2015 Appendix I: Price Decline Housing vs Tech Figure 78: Tracking the Recovery in Housing Stocks Index to 100 at peak 120 100 80 60 40 0 -5 Source: J.P. Morgan and Bamberg Bubble Peak Housing Composite Morran NASDAQ 1CC Peak-to-trough Housing Composite -89% NASDAQ 100 -78% 0 years after peak ID 15 27 EFTA01071315 Dubravko Lakos-Bujas (1-212) 622-3601 [email protected] Disclosures Global Equity Strategy and Quantitative Research 13 August 2015 J.P.Morgan This report is a product of the research department's Global Equity Derivatives and Quantitative Strategy group. Views expressed may differ from the views of the research analysts covering stocks or sectors mentioned in this report. 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Important Disclosures • Analyst Position: The following analysts (and/or their associates or household members) own a long position in the shares of MGIC Investment Corporation: Dubravko Lakos-Bujas. • Client: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients: MGIC Investment Corporation. Company-Specific Disclosures: Important disclosures, including price charts and credit opinion history tables, are available for compendium reports and all J.P. Morgan-covered companies by visiting huns://remm.conVresearchidisclosures, calling 1-800477-0406, or e-mailing research.disclosure.inquiriesOipmorgan.com with your request. J.P. Morgan's Strategy, Technical, and Quantitative Research teams may screen companies not covered by J.P. Morgan. For important disclosures for these companies, please call 1.800477- 0406 or e-mail research.disclosure.inauiries,,itinmorgan.com. Explanation of Equity Research Ratings, Designations and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight (Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst's (or the analyst's team's) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst's (or the analyst's team's) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperfonn the average total return of the stocks in the analyst's (or the analyst's team's) coverage universe.] Not Rated (NR): J.P. Morgan has removed the rating and, if applicable, the price target, for this stock because of either a lack of a sufficient fundamental basis or for legal, regulatory or policy reasons. The previous rating and, if applicable, the price target, no longer should be relied upon. An NR designation is not a recommendation or a rating. In our Asia (ex-Australia) and U.K. small- and mid-cap equity research, each stock's expected total return is compared to the expected total return of a benchmark country market index, not to those analysts' coverage universe. If it does not appear in the Important Disclosures section of this report, the certifying analyst's coverage universe can be found on J.P. Morgan's research website, www.jpmorganmarkets.com. J.P. Morgan Equity Research Ratings Distribution, as of June 30, 2015 Overweight Neutral (buy) (hold) Underweight (sell) J.P. Morgan Global Equity Research Coverage 44% 43% 13% IB clients., 51% 48% 38% JPMS Equity Research Coverage 45% 47% 9% IB clients., 71% 66% 57% •Percentage of investment banking clients in each rating category. For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category: our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category. Please note that stocks with an NR designation arc not included in the table above. Equity Valuation and Risks: For valuation methodology and risks associated with covered companies or price targets for covered companies, please see the most recent company-specific research report at hnre/Avviwipmorganmarkets.com contact the primary analyst or your J.P. Morgan representative, or email research.disclosure.inquiriesOipmorgan.com. 28 EFTA01071316 Dubravko Lakos-Bujas (1-212) 622-3601 [email protected] Global Equity Strategy and Quantitative Research 13 August 2015 J.P.Morgan Equity Analysts' Compensation: The equity research analysts responsible for the preparation of this report receive compensation based upon various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues. Other Disclosures J.P. Morgan ("JPM") is the global brand name for J.P. Morgan Securities LLC ("JPMS") and its affiliates worldwide. J.P. Morgan Cazenove is a marketing name for the U.K. investment banking businesses and EMEA cash equities and equity research businesses of JPMorgan Chase & Co. and its subsidiaries. All research reports made available to clients arc simultaneously available on our client website, J.P. Morgan Markets. 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