Taylor Morrison Home Corporation (TMHC - Free Report) is a home builder and land developer engaged in building single-family detached and attached homes for first-time buyers, move-up families, and active adult (55+) customers. Its three most popular brands are Taylor Morrison, Monarch and Darling Homes, concentrated in the Arizona, California, Colorado, Florida and Texas states.
The construction sector, to which it belongs, is the second of 16 Zacks-classified sectors and has returned 38.1% year to date. Of the seven companies that have reported earnings this quarter, 5 have topped the Zacks Consensus Estimate while 2 have missed.
The building products industry, to which Taylor Morrison belongs, has the highest rank within the sector. So there are many opportunities here including Atlantia (ATASY - Free Report) , Aegion Corp (AEGN - Free Report) , Boise Cascade (BCC - Free Report) , D.R. Horton (DHI - Free Report) , Beazer Homes USA (BZH - Free Report) and more. But the reasons I think Taylor Morrison stands out are as follows-
1. Growth Story
The company has generated double-digit year-over-year revenue growth in each of the last four quarters and more than doubled its revenue between 2013 and 2018. Current year revenues look set to outpace the growth rate in any of these years.
Irrespective of the doldrums the residential construction business is in, Taylor Morrison’s numbers indicate that it can continue on the growth path. In its last quarter, units sold increased over 30%, orders grew 20% with backlog increasing 4.5%.
The backlog represents a 7% increase in units and 1% increase in value, mainly on account of adding the entry-level segment.
TMHC also has the resources to continue catering to the strong demand it’s seeing. At the end of the last quarter, owned (80%) and controlled lots numbered approximately 54,000 and based on the trailing 12 months’ closings, this amounts to 5.3 years of supply with 2019 and 2020 procurement more or less complete.
Around 95% of guided units were in inventory at quarter-end. The mid-point of guided units represents around 45% of closing backlog.
Customer segmentation has been a key strategy for the company, allowing it to drive higher prices and therefore, margins. Given the growing demand at the entry-level and stronger pricing at 50+, its recent partnerships and acquisitions have focused on these two segments.
2. Key Partnership
Taylor Morrison has signed an “exclusive strategic partnership” with Christopher Todd Communities (CTC), which is focused on build-to-rent single-family housing communities.
The National Multifamily Housing Council stated in their vision 2030 report that the number of renter households has been increasing by 800,000 a year since 2010. So building 4.6 million new rental units over the next 10 years will be required to cater to this demand. Management says that while there are approximately 16 million single-family rental homes in the market today, new home production dedicated to this segment is less than 5% of the total. So there is significant scope for expansion.
CTC is a relatively small player in the space, but it’s differentiated from other players because of its focus on building lifestyle communities. This differentiating factor fits Taylor Morrison’s somewhat premium brand image, which is what makes the deal a perfect fit. Moreover, this is likely the reason it is a hit with millennials, which comprise 50% of its communities. This demographic group wants to spend the least amount of time and money on maintenance, so they prefer rental apartments where all or substantially all of the maintenance work is taken care of.
CTC’s experience on the property management side is what Taylor Morrison is banking on. So while TMHC will focus on land acquisition (after burning through CT’s current inventory), development and construction, CT will be in charge of overseeing design, planning, building science, leasing and property management.
The partnership plans to develop 2,000 single-family rental homes to be delivered over the next few years in Arizona alone. Others will follow, including some from TMHC land holdings. Management doesn’t intend to hold the properties for much longer than a year after completion, so that’s when sales will be recorded. CT has high renewal rates, and 90% of people that don’t renew are looking to purchase a property. So this may open up additional opportunities for TMHC.
Additionally, it will increase scale efficiencies in both purchasing and construction, thereby lowering cost.
3. Strategic Acquisition
In the fourth quarter of 2018, it closed the acquisition of AV Homes. AV increased its share in five important markets (Orlando, Phoenix, Charlotte, Raleigh and Dallas-Ft. Worth) while adding Jacksonville. Management said that the combined company would be among the top five in six markets and top 10 in 14 markets, thus helping it scale and drive profitability.
The acquisition also added two important customer segments. Taylor Morrison was always associated with an upwardly mobile, second-home purchaser, or slightly more premium segment. The acquisition has added to the entry-level, and augmented, particularly in the Orlando, Phoenix and Raleigh areas, the active adult/55+ segment, thus broadening its scope. Affordable housing for the entry-level/first-time buyer is a particularly hot segment, where demand exceeds supply. So it’s an important place to be in.
When management announced the acquisition, they expected annualized synergies of $30 million, but on the last conference call, they said they were on track to achieve annualized synergies of $50 million. This was despite the fact that the acquisition increased its headcount by 20%.
The main downsides were the $400 million of debt it brought that the company has already started paying off and the gross margin impact from the addition of a segment with a lower margin profile.
4. Economy Is Supportive
A very big economic factor pushing home sales are interest rates, particularly on 30-year fixed-rate maturities because that’s the one most home-buyers go for. According to Freddie Mac, that rate is now down 1.06 percentage points from last year to 3.65%. It expects the fourth-quarter and 2019 rate to average at 3.7% and 4%, respectively. Fannie Mae and Mortgage Bankers Association expect the 2019 average to be 3.9% and 3.8%, respectively.
Rates are expected to remain low in 2020 as trade war uncertainties have pushed investors to the safe haven of treasuries, which is keeping interest rates down. As a result, refinancing activity is high and millennials are jumping into the action.
Management said that low interest rates are encouraging entry-level buyers while increasing the confidence of move-up buyers, both of which are helping the company.
Additionally, the low unemployment rate, rising wages and disposable income and a modest inflation rate are other factors helping demand.
5. Financial Metrics & Valuation
Taylor Morrison carries a Zacks Rank #1 (Strong Buy). See the complete list of today’s Zacks #1 Rank stocks here. The company has a growth score A, which means it is particularly suitable for growth investors willing to take a certain amount of risk or wait a certain amount of time to take in notable returns on their investments. However, its Value Score B indicates that it is also worth holding on to for the long haul. The Zacks Rank and Investment Score are proprietary technologies designed to generate better returns for investors.
In the five years ending Dec 2018, the company has grown revenue, gross profit, EBIT and EPS before non-recurring items at a CAGR of 11.8%, 6.9%, 9.0% and 6.1%, respectively. Revenue growth in 2019 and 2020 are currently expected to be 12.0% and 4.6%, respectively. Earnings are expected to grow 4.5% and 10.7%, respectively.
Earnings estimates are relatively steady in the last 60 days, although they improved since the last earnings report. The company has topped earnings estimates by more than 20% in each of the last four quarters, averaging 41.8%.
Shares have appreciated 9.1% over the past month compared to 0.9% for the S&P 500.
But there’s further room for upside as you can see below-
Its price-to-earnings (P/E) value of 9.11X trails the S&P 500’s 17.31X and is approaching the high end of the historical range over the past year. However, this is better than the P/E for the S&P 500, which is at the high end of its historical range.
Since the company holds a significant amount of assets, it’s worth taking a look at its price-to-book value (P/B) valuation as well. As seen from the chart below, TMHC has a P/B value of 1.2X, which trails the 4.08X of the S&P 500. Both values are close to the high end of their historical range over the past year.
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