At this point, the house building space is incredibly interesting. On the one hand, you have a nationwide housing shortage that has been instrumental in driving up prices over time. And on the other hand, you worry about a potential recession, inflation and rising interest rates aimed at combating that inflation. From the data I’ve seen looking at a number of players in this space, prices are still high, but the backlog from a unit perspective is down. But to make matters even more interesting, the fact is that the stocks of many players in this space seem to be trading low. Where these companies go next will be determined by market conditions. And one prospect that investors should be wise to watch closely is Taylor Morrison Home Corporation (NYSE: TMHC). Although the company’s price is mixed compared to similar companies, the shares are still cheap in absolute terms. As such, I’ve rated the company as a moderate “buy” at the moment, indicating that I think the stock will likely outperform the broader market going forward.
Performance remains strong…for now
At the end of January of this year, I wrote an optimistic article on Taylor Morrison. In this article, I said that the company has experienced attractive growth in recent years, with this growth continuing through fiscal 2021. This was driven by two factors, including an increase in the number of homes built and an increase in the prices of the houses it produced. I was worried at that time about a potential return to more normal activity levels. But even in this scenario, I said equities offer a favorable risk-reward opportunity. Ultimately, this led me to rate the company as a “buy”. Unfortunately, things didn’t go exactly as planned. While the S&P 500 has fallen 3.9% since I last wrote about the company, it generated a loss for investors of 4.6%. It’s not a big difference, but it’s still the opposite of what I wanted to happen.
Given this modest decline, it is reasonable to assume that the company’s fundamental performance has suffered. But that’s definitely not the case. Consider, for example, how the company ended its 2021 fiscal year. That year, sales reached $7.50 billion. This is 22.4% more than the $6.13 billion generated at the same time a year earlier. This increase is due to several factors. First, the number of home closings reported by the company rose from 12,524 to 13,699. Additionally, the average sale price of homes rose from $468,000 to $524,000. Other fundamentals were also promising. The number of unfilled units increased from 8,403 to 9,114. In addition, the average price per unfilled unit also increased, from $503,000 to $632,000. In theory, this increase in order backlog, combined with rising prices, should indicate renewed strength for the foreseeable future.
With revenues rising, profitability followed. Net income fell from $243 million in 2020 to $663 million in 2021. Operating cash flow declined from $1.12 billion to a modest $376.6 million. But if we adjust for changes in working capital, it would have gone from $409.1 million to $872.2 million. Another metric to pay attention to is EBITDA. This amount eventually fell from $697 million to $1.05 billion.
The strength of the business continued in fiscal 2022. For the entire first half of the year, revenue was $3.70 billion. This is 17.9% more than the $3.14 billion generated a year earlier. However, the only real driver of this development has been an increase in the average selling price of a property. That number went from $494,000 to $608,000. Meanwhile, the number of closures fell from 6,089 to 5,800. Part of this can be attributed to a reduction in orders. However, the company also saw its contract termination rate drop from 5.8% to 8.5%. When you focus only on the last trimester, this picture is even worse. Yes, revenue reached $2 billion. This compares favorably to the $1.72 billion generated in the second quarter of 2021. However, the increase is solely due to the increase in average selling prices from $503,000 to $621,000. This was offset to some extent by a reduction in the number of closures from 3,268 to 3,032. To make matters worse, the total number of units on hold fell from 10,278 to 8,922, largely due to a increase in cancellation rate from 5.2% to 10.8%.
These leading indicators suggest that the company’s future may not be as bright as the recent past. But so far, bottom line performance has been quite robust. Net income for the first half of fiscal 2022 was $467.7 million. This is more than double the $222.2 million generated at the same time a year earlier. Operating cash flow fell from negative $97.6 million to $195.5 million. If we correct for changes in working capital, it would have gone from $264.9 million to $506.3 million. Meanwhile, the company’s EBITDA also improved from $370.6 million to $686.2 million.
Management has not provided any real guidance for the current year. But if we analyze the results achieved so far, we should anticipate a net income of around $1.40 billion. Adjusted operating cash flow would be $1.67 billion, while EBITDA would be around $1.94 billion. If those numbers come to fruition, stocks would look pretty cheap, with a futures price on an earnings multiple of 2.3, a futures price on an adjusted operating cash flow multiple of 1.9, and a multiple of EV to EBITDA of 3. Even if earnings return to 2021 or even 2020 levels, as the chart above illustrates, those multiples would still imply a fairly cheap business.
To put the company’s pricing into perspective, I compared its 2021 results to the performance of five similar companies. On a price-earnings basis, these companies ranged from a low of 2.9 to a high of 8.2. In this case, four out of five companies were cheaper than our prospect. Using the price versus operating cash flow approach, only two of the companies performed positively, with their multiples at 3.2 and 6.8, respectively. In this case, Taylor Morrison was in the middle of the two. And finally, using the EV to EBITDA approach, the range is 3.2 to 6.9. In this case, our prospect is more expensive than three of the companies.
|Company||Prizes / Earnings||Price / Operating Cash||EV / EBITDA|
|Taylor Morrison Home Corporation||4.9||3.7||5.5|
|Legacy Housing Corporation (LEGH)||8.2||6.8||6.9|
|Meritage Homes (MTH)||3.5||3.2||3.2|
|Communities of the Century (CCS)||2.9||N / A||3.7|
|Beazer Homes United States (BZH)||2.5||N / A||6.6|
|KB Home (KBH)||4.3||N / A||5.1|
Based on the data provided, it seems to me that the short-term outlook for Taylor Morrison is quite promising. Sure, we’re starting to see major cracks in space. The drop in order book and the increase in cancellations seem to be a problem for investors. But given that stocks are cheap, even a return to more normal levels would indicate upside potential. So because of that, I decided to keep my “buy” rating on the company.