Arizona homebuilder Taylor Morrison (NYSE:TMHC) announced Feb. 12 that it was exiting the Chicago market with no plans to return. While the move could appear to be a sign of weakness by investors, Taylor Morrison stock remains an exciting buy among homebuilders.
“We made the difficult decision to sell a substantial composition of our assets to M/I Homes,” Erik Heuser, chief operating officer and executive vice president at Taylor Morrison, said in an email to Crain’s Chicago Business. “We do not plan on any future developments in the Chicagoland market in the foreseeable future.”
Sometimes, discretion is the better part of valor.
Taylor Morrison believes that it would have taken it five years to sell the 232 suburban lots it sold to M/I Homes (NYSE:MHO). In 2019, it sold 47 homes at the eight subdivisions it owned in the Chicago area. That works out to half a home sold per subdivision per month.
The only problem? The average homebuilder needs to sell two homes per month per subdivision to be a viable operation. Perhaps M/I Homes can work some magic on those 232 lots.
However, from where I sit, this is one reason of many to own Taylor Morrison stock.
Reasons to Buy Taylor Morrison Stock: It Has a Veteran CEO
In early January, Taylor Morrison CEO Sheryl Palmer was voted Businessperson of the Year in Phoenix Business Journal’s online poll. Palmer received 28% of the total votes, 300 basis points higher than the runner up.
Palmer, who has more than 30 years of industry experience, became CEO of Taylor Morrison in August 2007. The board added the role of Chairman of the Board in May 2017. In the almost 13 years she’s been CEO, Taylor Morrison has grown into a homebuilder with home prices from the high $100,000’s on the low end to $8 million on the high end.
Not only has Palmer created a homebuilder selling homes at multiple price points, but she’s also taken the company public (2013) and executed a multi-billion-dollar merger (2020).
In the fourth quarter, Taylor Morrison delivered earnings of $1.06 per share, 8 cents higher than the consensus estimate, and 20 cents higher than a year earlier.
Palmer’s steady hand remains one of the company’s strongest cards to play.
It Walks the Talk When It Comes to Diversity
Palmer recently appeared on CNBC to discuss how corporate America is missing out by not adding more women and “true diversity” to its workforce.
“The benefit of our organization is that we have different people thinking about the same problem differently,” Palmer told Jim Cramer in a “Mad Money” interview. “It gets us to a better place, and that’s what corporate America is missing today.”
The Wall Street Journal found that of the 3,000 largest companies in the U.S., only 180 were led by a woman. That’s a problem given recent comments by Goldman Sachs (NYSE:GS) CEO David Solomon. According to Solomon, U.S. companies with female directors outperform those without a woman on the board. The fact that Taylor Morrison has four women on its board out of a total of seven directors suggests TMHC is an excellent long-term buy.
Interestingly, the S&P 500 company with the highest percentage of women on their board is Navient (NASDAQ:NAVI) at 58%. Taylor Morrison, were it a part of the index, would be right behind Navient at 57%.
Gender diversity is good business, and Palmer knows it.
Value Investors Own TMHC
Taylor Morrison’s stock is currently valued at 9.1 times its forward price-to-earnings ratio and 0.61 price-to-sales. In terms of its free cash flow yield (FCF divided by enterprise), Taylor Morrison’s is 7.3% based on $210 million in trailing 12-month free cash flow and $2.87 billion in enterprise value.
Generally, value investors consider anything above 8% to be in value territory. So, although it’s not quite there, it’s getting darn close. Perhaps that’s why long-time value investor Donald Smith & Co. is one of the company’s largest shareholders. As of the end of December 2019, it owned 7.2 million shares or 6.6% of the stock.
Donald Smith & Co.’s website states:
“Our investment strategy targets out-of-favor companies valued in the bottom decile of price-to-tangible book value ratios. Studies have shown, and our long record of outperformance has confirmed, that this universe of stocks substantially outperforms the broader market over extended cycles.”
The value investor has been finding hidden gems for 40 years. If Taylor Morrison’s one of its most significant holdings, there’s only one reason why. It thinks its stock is cheap.
The company completed its $2.4 billion acquisition of California homebuilder William Lyon Homes on Feb. 6. Taylor Morrison paid for the purchase with $2.50 in cash per share plus 0.800 shares of Taylor Morrison stock. I would strongly suggest William Lyon shareholders hang on to their TMHC stock.
That’s because the merger creates the 5th-largest homebuilder in America with 14,200 closings in the past 12 months alone. Further, it has a top five market position in 16 of its 23 markets in the U.S. It intends to find $80 million in annualized run-rate synergies to help pay for the acquisition.
Together, the two builders have a backlog of $3.1 billion and own or control more than 82,000 lots across the country. The pipeline is more than full.
Since Taylor Morrison’s IPO in 2013, it has made six different acquisitions with William Lyon Homes being the largest to date. CEO Sheryl Palmer has proven her team is good at integrating acquisitions into the fold.
Onward and upward.
Its Business Is Very Healthy
The company reported its fourth-quarter and fiscal 2019 results on Feb. 5. As stated earlier, it beat analyst expectations on both the top- and bottom-line.
“To say that 2019 was a pivotal year in Taylor Morrison’s history would be an understatement. We surpassed 10,000 sales orders for the first time, marking a significant milestone for us, and the sales momentum we saw build in 2019 has continued into 2020,” Palmer stated in its Q4 2019 press release.
“We delivered 9,964 closings in 2019, an almost 14 percent increase over our results for the prior year and in-line with our most recent guidance.”
For all of 2019, Taylor Morrison’s revenue grew 12.6% year over year to $4.8 billion, while its earnings rose 23.4% from $206.4 million in 2018 to $254.7 million in the past year. On a per-share basis, they increased by 28.4% due to fewer shares outstanding.
With the acquisition closed, it expects to be able to provide annual guidance for the merged entity in April when it reports Q1 2020 results. Investors should expect another strong year from Taylor Morrison.
Solid Growth Since Its 2013 IPO
Taylor Morrison has an interesting history.
It used to be part of U.K. homebuilder Taylor Wimpey Homes (OTCMKTS:TWODY) until it was sold to a consortium of private equity businesses for $995 million in April 2011. Like many real estate companies, Taylor Morrison suffered through the dog days of the financial crisis and its aftermath.
“We’ve weathered the storm while remaining true to our core values,” Palmer said at the time. “We’ve pulled through with a structure that we feel is very viable in today’s market.”
Two years later, the private equity sponsors took Taylor Morrison public on April 10, 2011, selling 32.9 million shares of its stock at $22 apiece. In January 2018, the company’s private equity sponsors sold the rest of their shares. It was finally a completely independent company.
When Taylor Wimpey sold Taylor Morrison in 2011, TMHC had annual revenues of $1.3 billion and a pre-tax income of $88.7 million. In 2019, its sales were almost four times as large, and its adjusted pre-tax income was nearly five times higher. That’s a compound annual growth of 15/6% and 18.5%, respectively, over those nine years.
Under Palmer’s leadership, the company’s growth over the next nine years should also be healthy and robust.
One of the World’s Most Admired Companies
Industry awards can often be nothing more than a pat on the back for companies that a consumer business magazine or trade publication wants to secure as an advertising client. So, it’s wise to take these things with a grain of salt.
On Jan. 22, Taylor Morrison announced that it made Fortune’s 2020 list of World’s Most Admired Companies. It was the homebuilder’s second consecutive year making the list. It was ranked 286th out of 331 companies. In the shelter category, Taylor Morrison was one of 15 companies to make the list, including two other homebuilders; PulteGroup (NYSE:PHM) and Toll Brothers (NYSE:TOL).
I don’t know about you but that’s pretty good company.
As I said, its recognition that has to be taken with a grain of salt. However, given the company’s views on diversity in the workplace, it’s not surprising that Taylor Morrison made the cut.
If you like to invest in companies that care about their people, Taylor Morrison, at the very least, ought to be on your watchlist.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.