Buyers looking for a new house may need to throw their name in a hat and hope to win the lottery.
Taylor Morrison Home,
a builder based in Arizona, is holding drawings for purchases in hot markets like Austin, Texas, and Phoenix. Prime home lots are selling for $50,000 premiums in auctions. “We’re in a very strong market,” says Taylor CEO Sheryl Palmer.
Home-builder stocks are up 37% this year, reflecting dizzying demand, ultralow mortgage rates, and maddening construction delays. Just 34,000 completed new homes were on the market in July, well below the 87,300 average for the month since 1973. Bidding wars have broken out, including camp-outs where buyers set up umbrellas and barbecues on the sidewalk, waiting to be first in line for a new house, says BTIG analyst Carl Reichardt.
If there’s still a value play, it may be Taylor Morrison’s own stock (ticker: TMHC). It’s up just 10% this year and has gained less than half the 97% industry average over the past three years. Taylor trades around book value, compared with 1.8 times book for the industry. At a recent price of $28, it goes for 4.3 times estimated 2022 earnings, a 30% discount to peers.
The discount looks excessive. While Taylor isn’t the most profitable builder, it’s taking measures to lift returns. The company has pledged to boost gross margins on home-sale closings, from 20% in 2021 to 22% next year, and it’s aiming for a 20% return on equity, up from the high teens now. Taylor is streamlining floor plans to cut construction costs. And the company controls 76,000 lots, including raw land and plots under development. It plans for nearly 400 communities with houses for sale by year-end 2022, up from 330 in 2021.
“The stock is inexpensive,” says Reichardt, who sees it hitting $38 over the next year. “It’s a call option on the company improving efficiencies and margins. The market doesn’t believe Taylor will do that, but there’s a large margin of safety in the stock.”
The country’s No. 5 builder, Taylor focuses on West Coast and Sunbelt markets, many with healthy population growth. Under Palmer, CEO since 2007, Taylor has bought 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-level, move-up, and “active adult” homes—typically in age-restricted developments for people over 55.
Taylor’s average closing price hit $503,000 in the June quarter, up from $458,000 last year. Houses that sold in the quarter for future delivery are averaging $597,000. Its order backlog has been growing, reaching 10,228 in June.
Palmer says demand has cooled from a “frenzied” spring, but she’s still expecting healthy sales throughout the year. The biggest obstacle now: finding labor and materials. Lumber prices remain elevated, despite dropping sharply from the spring. Lead times for windows 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.
|Market Value (bil):||$3.5|
|2022E Sales (bil):||$8.5|
|2022E Net Income (mil):||$847|
Taylor aims to close 14,500 to 15,000 homes this year, up 18% from 2020. Growth is likely to slow next year to 1%, according to consensus estimates, and Taylor’s backlog of signed house contracts is expected to fall slightly. But with prices on the rise, and Taylor working to lift margins, profits should rise. Consensus analyst estimates have Taylor earning $5.13 a share this year and $6.60 in 2022.
Why does the stock look so cheap? Investors worry that the industry’s fuel—low rates, big job gains, and a shift to the exurbs—won’t last. Escalating prices are pressuring affordability and may push out first-time buyers.
For Taylor, investors may be leery of more acquisitions. Builders often overpay and then take accounting hits on inflated land values, says Reichardt. Palmer says “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 builder doesn’t dominate any local market or product niche, says Reichardt, who calls it a “tweener,” lacking the purchasing power of larger builders. “A lot of margin improvement is driven by depth of local market share,” he says. “They don’t have that.” Palmer says that Taylor is a top-five builder in many markets and she has “tremendous confidence” about hitting the 22% target.
Investors aren’t paying much to give her the benefit of the doubt. Alex Barron, an independent analyst and head of the Housing Research Center, estimates that Taylor’s book value will rise from $27 to $31 over the next year. Strip out $5 a share in goodwill, or intangible assets, and it would be worth $26 in a liquidation, he says, pegging the stock at $45 in a bull case. “The upside/downside is very compelling compared to other builders,” he says.
Wedbush Securities’ Jay McCanless likes the margin story and sees earnings reaching $6.58 a share in 2022. Even if the stock achieves a peer multiple of six times his earnings-per-share forecast, it would trade at $39, below his $46 target. “The earnings potential and pricing power are there,” he says. If he’s right, investors may have a winning lottery ticket, too.
Write to Daren Fonda at email@example.com