Taylor Morrison Home Corporation: After Rising Through The Roof, Shares Offer Additional Upside

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Taylor Morrison Home Corporation shares have outperformed the broader market, up 26.3% since August 2023 and 101.6% since January 2022.Despite mixed financial performance, shares of Taylor Morrison ...

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Tony Anderson I have always found the homebuilding industry to be a fascinating space. Perpetual undersupply and an asset that historically almost always goes up makes for an appealing prospect if the price is right. This, in turn, should make any homebuilder that is well run worth considering. That has been the attitude with which I have approached every analysis of Taylor Morrison Home Corporation (NYSE:TMHC) since first writing about it in January of 2022. The most recent article that I wrote about the firm was published in August of last year. In that article, I acknowledged that shares had seen significant upside even though financial performance had been mixed. But between my view that the industry was showing positive signs of growth and how cheap shares were, I had no choice but to keep the company rated a ‘buy’ to reflect my view that shares should outperform the broader market for the foreseeable future. Since then, that is precisely what transpired. Shares of the homebuilder are up a whopping 26.3%. That's comfortably above the 17.8% increase seen by the S&P 500 over the same window of time. And since I first rated the company a ‘buy’ back in January of 2022, shares have seen upside of 101.6%. That's far above the 21.2% increase seen by the broader market. Given concerns that the economy might finally slow down, combined with how much the stock has risen, you might think that I would finally be downgrading the business. But that's not the case. In fact, shares still seem attractive, both on an absolute basis and relative to similar firms. When you add on top of this some positive indicators provided by management that should dwarf recent weakness, I cannot do anything other than keep it rated a ‘buy’ for now. Shares can keep climbing Author - SEC EDGAR Data Fundamentally speaking, things have been a bit mixed for Taylor Morrison as of late. For starters, we should touch on revenue. Since I last wrote about the company, we have seen a couple of additional quarters worth of data, out. The most recent data covers the first quarter of the 2024 fiscal year. For that time, sales came in at just under $1.70 billion. That's an increase of 2.3% over the $1.66 billion generated the same time of the 2023 fiscal year. This increase came about as a result of a rise in the number of home closings from 2,541 to 2,731. However, this number was somewhat offset by a decline in the average closing price from $635,000 per home to $599,000 per home. Author - SEC EDGAR Data Even though revenue increased modestly, profitability pulled back just a hair. Net income, for instance, dipped from $191.1 million to $190.3 million. There were multiple changes that affected this to some extent. As an example, sales, commissions, and other marketing expenses, increased from 5.58% of revenue to 6.04%. While this may not seem like much of a difference, when applied to the revenue seen in the first quarter of this year, it amounts to $7.8 million of lower profits on a pre-tax basis. Other profitability metrics largely followed suit. Operating cash flow, for instance, fell from $347.4 million to negative $130.7 million. If we adjust for changes in working capital, however, the metric would have risen from $212.8 million to $213.7 million. Lastly, EBITDA for the business managed to dip from $284.3 million to $281.1 million. Author - SEC EDGAR Data As you can see in the chart above, this is not the first time that the company has faced some pressure. In 2023, revenue, profits, and cash flows, were all lower year over year. This came about as the number of home closings dropped rather dramatically from 12,647 to 11,495. At the same time, the company suffered from a drop in the average closing price from $624,000 to $623,000. This decline was industry wide, however. After all, inflationary pressures, combined with high interest rates aimed at combatting inflation, all worked negatively to severely impact the ability and willingness for consumers to buy homes. In late 2022 and early 2023, I felt as though that weakness would persist through at least the 2023 calendar year. But by the middle of the year, I came to see some positive indicators that suggested that the housing shortage was more than offsetting pressures on home buyers. Author - SEC EDGAR Data This is not to say that everything is going great for Taylor Morrison at this point in time. There are some issues to contend with. Most notably, the number of homes that it has in its backlog still remains lower year over year. By the end of the first quarter of 2024, the company had 6,244 homes in its backlog. This was down from the 6,267 homes that it had one year earlier. The good news about this, however, is that there was an offset in the respect that average home prices in backlog came in higher year over year, rising from $676,000 to $680,000. Author - SEC EDGAR Data You may think that, with numbers like these, I would be more pessimistic about the company. However, there are some really positive signs for investors to enjoy at this moment in time. Most significantly, in my opinion, would be the net new orders of homes. In the first quarter of this year alone, the company saw net new orders totaling 3,686. While the average order price of $608,000 is still below the $626,000 reported for the first quarter of 2021, the number of net new orders is up significantly, about 29.2% in fact, over the 2,854 net new orders reported for the first quarter of the 2023 fiscal year. Author - SEC EDGAR Data Another positive is that the cancellation rate of homes has dropped significantly. From 2022 to 2023, the company did see an improvement in the cancellation rate from 13.5% to 12.1%. In the first quarter of 2023, the company had a rather lofty cancellation rate of 14%. However, by the first quarter of this year, that number had plummeted to a paltry 7%. What all of this means is that, while backlog still remains lower year over year, and pricing may not be ideal, consumers are looking to buy homes again and they are following through with those commitments far more now than they were even one year ago. This is definitely a net positive for the company and its investors. Management does expect this strength to benefit shareholders for the current fiscal year. For 2024 in its entirety, they expect closings of around 12,500 homes. That would be up from the 11,495 closings experienced in 2023. They do unfortunately expect the average price of a home closing to be lower at between $600,000 and $610,000. That does compared negatively to the $623,000 reported for the 2023 fiscal year. But if demand for properties remains elevated, it's only a matter of time before the average price per home sold increases. Author - SEC EDGAR Data Given that management does not provide any real guidance for the bottom line, it might just be best to value the company using results from both 2022 and 2023. In the chart above, I did precisely that. It's always wonderful to see a company trade in the mid to high single digit range as is the case here. In addition to the stock being cheap on an absolute basis, shares also look cheap relative to similar firms. In the table below, I compared the company to five similar enterprises. When it came to both the price to earnings approach and the price to operating cash flow approach, only one of the five companies was cheaper than it. And when it came to the EV to EBITDA approach, Taylor Morrison ended up being the cheapest of the group.   Company Price / Earnings Price / Operating Cash Flow EV / EBITDA   Taylor Morrison Home Corporation (TMHC) 8.3 7.4 6.3   Legacy Housing Corporation (LEGH) 11.4 44.3 8.4   Meritage Homes (MTH) 8.5 21.6 6.5   Century Communities (CCS) 9.8 74.7 9.3   Beazer Homes USA (BZH) 5.7 25.8 10.1   KB Home (KBH) 10.0 5.9 8.4   Click to enlarge Outside of the fundamental data, there are some other interesting data points that investors should be aware of. For starters, I actually find management's claim of the number of closings expected for this year to be a bit surprising. The most recent data available from the US Census Bureau, for instance, estimated that, in the month of April, the number of building permits totaled 1.44 million. That was actually 2% lower than the 1.47 million reported for April of 2023. Housing starts, for instance, totaled 1.36 million. This is only 0.6% lower than the 1.37 million reported for the same time one year earlier. US Census Bureau In all likelihood, the strength that management is expecting this year relative to what the data suggests is likely attributable to the overall business model that Taylor Morrison champions. First and foremost, while it is a firm with a pretty significant reach across the nation, it largely operates in major states like California, Texas, and Florida. It also touches on a couple of other sunbelt states like Georgia and the Carolinas. These are all fairly attractive markets compared to other parts of the country like the Midwest or even the Northeast. In addition to this, the company is a diverse operator that focuses on multiple customer types. Most notably, 37% of its revenue comes from entry level buyers, while another 44% comes from those in the ‘move up’ category. Although these are the types of customers that are likely to be the most price conscious, they are also the customers for which housing is in strong demand. The company also does get to benefit from high end customers, as measured by the 19% of revenue that comes from what management calls the ‘resort lifestyle’ group. So that should help to buoy results during difficult times. Taylor Morrison Home Corporation Takeaway  Even though the financial performance achieved by Taylor Morrison might not be perfect, the company seems to be on solid footing and shares look cheap. Leading indicators are incredibly bullish for investors at this point in time and that is true not only on an absolute basis, but also relative to similar firms. All things considered, this leads me to maintain my ‘buy’ rating on the company because of how attractive I find it.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.24.0","shortVersion":"4.24.0","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2438855726"}