Taylor Morrison Home Stock trails her peers. But in a hot market, it’s a game of value.
Buyers looking for a new home may have to throw their name in a hat and hope to win the lottery.
Taylor Morrison Home,
an Arizona-based builder holds designs for purchases in hot markets like Austin, Texas and Phoenix. Prime residential lots sell for $ 50,000 in premiums at auction. “We are in a very strong market,” says Sheryl Palmer, CEO of Taylor.
Homebuilder stocks have risen 37% this year, reflecting skyrocketing demand, ultra-low mortgage rates and maddening construction delays. Only 34,000 new completed homes were on the market in July, well below the average of 87,300 for the month since 1973. Bidding wars have erupted, including encampments where buyers set up umbrellas and barbecues. on the sidewalk, waiting to be the first for a new home, says BTIG analyst Carl Reichardt.
If there is still a play of value, it may be Taylor Morrison’s own stock (ticker: TMHC). It has only grown 10% this year and has gained less than half the industry average at 97% over the past three years. Taylor is trading around the book value, compared to 1.8 times the book value for the industry. At a recent price of $ 28, it’s worth 4.3 times the estimated earnings in 2022, a 30% discount from its peers.
The discount seems excessive. Although Taylor is not the most profitable builder, he is taking steps to increase yields. The company has pledged to increase gross margins on home sales fences, from 20% in 2021 to 22% next year, and is targeting a 20% return on equity, up from teens current. Taylor streamlines floor plans to reduce construction costs. And the company controls 76,000 lots, including raw land and development plots. It forecasts nearly 400 communities with homes for sale by the end of 2022, up from 330 in 2021.
“The stock is cheap,” says Reichardt, who sees it hit $ 38 over the next year. “This is a purchase option on the company which improves its efficiency and its margins. The market doesn’t believe Taylor will, but there is a large margin of safety in the stock.
The number 5 manufacturer in the country, Taylor focuses on the West Coast and Sun Belt markets, many of which are experiencing healthy population growth. Under Palmer, CEO since 2007, Taylor has purchased five builders over the past seven years, including AV Homes in 2018 and William Lyon Homes in 2020. The acquisitions have expanded Taylor’s geographic reach and product line to include entry upscale, upscale, and “working adult” homes — usually in housing estates with age restrictions for people over 55.
Taylor’s average closing price reached $ 503,000 in the June quarter, up from $ 458,000 last year. Homes sold during the quarter for future delivery average $ 597,000. Its order book increased to 10,228 in June.
Palmer says demand cooled after a “frenzied” spring, but she still expects healthy sales throughout the year. The biggest obstacle now: finding labor and materials. Lumber prices remain high, despite a sharp drop from the spring. Window delivery times have more than doubled, she says, and everything from garage doors to flooring is arriving later than usual. “It’s like playing double-fisted Whac-A-Mole,” she says of the sourcing effort.
|Recent price:||$ 28.15|
|Modification of the current fiscal year:||9.7%|
|Market value (bil):||$ 3.5|
|Sales 2022E (bil):||$ 8.5|
|Net income 2022E (in millions):||$ 847|
|BPA 2022E:||$ 6.60|
E = estimate
Taylor is aiming to close 14,500 to 15,000 homes this year, up 18% from 2020. Growth is expected to slow next year to 1%, according to consensus estimates, and Taylor’s backlog in matters. of signed housing contracts should decrease slightly. But with prices rising and Taylor striving to increase margins, profits are expected to rise. Consensus analysts estimate Taylor would earn $ 5.13 per share this year and $ 6.60 in 2022.
Why does the stock seem so cheap? Investors fear that the fuel for industry (low interest rates, large job gains and displacement to the peripheries) will not last. Escalating prices put pressure on affordability and can crowd out first-time buyers.
For Taylor, investors may be wary of more acquisitions. Builders often pay too much and then take accounting notes on inflated land values, says Reichardt. Palmer says the “synergies” from the Lyon deal should start to materialize over the next few months and that she has “no plans” for acquisitions.
Investors may also be skeptical of Taylor’s margin targets. The automaker does not dominate any local market or product niche, says Reichardt, who calls him a “pre-teen,” lacking the purchasing power of the big manufacturers. “Much of the improvement in margins is due to the depth of local market share,” he says. “They don’t have that.” Palmer says Taylor is one of the top five builders in many markets and has “tremendous confidence” that the 22% target will be met.
Investors aren’t paying a lot to give it the benefit of the doubt. Alex Barron, independent analyst and director of the Housing Research Center, estimates that Taylor’s book value will drop from $ 27 to $ 31 over the next year. Take out $ 5 per share of goodwill or intangible assets, and that would be worth $ 26 in a liquidation, he says, fixing the share at $ 45 in a bulls deal. “The advantages and disadvantages are very convincing compared to other manufacturers,” he says.
Jay McCanless of Wedbush Securities likes the margin story and sees earnings hit $ 6.58 per share in 2022. Even if the stock hits a multiple of six times his earnings per share forecast, it would trade at $ 39 , below his goal of $ 46. “The earning potential and the pricing power is there,” he says. If he is right, investors may also have a winning lottery ticket.
Write to Daren Fonda at [email protected]