Taylor Morrison Home Corporation’s (TMHC) revenue will benefit from increasing community count and higher ASPs over the coming years. It will also see better margins thanks to higher home prices and cost-efficiency. Assuming the stock trades at P/TBV of 1.1x by FY2023 end, we get a price target of ~$47.80 or ~ 56.70% upside over the next two years.
Taylor Morrison is one of the largest homebuilders in the United States which designs, builds, and sells single-family and multi-family homes in traditionally high growth markets for entry-level, move-up, active adult buyers, and urban homes. Amidst Covid-19 lockdown in 2020, Taylor Morrison acquired William Lyon Homes for ~$2.5 bn, which enhanced its market share in Phoenix as well as gave it a larger share of entry-level homes.
Rising share of active-adult and urban consumers
The company has seen a significant rise in active adult and urban homebuyers in recent years. Active adult and urban consumers now account for ~25% share of TMHC’s total net orders, up from mid-teens a few years back. This makes the company well-positioned to capture the rising demand from boomer generations in the coming years as they approach retirement age.
This will also help the company’s home closing ASPs going forward as these buyers tend to spend more on home buying. TMHC’s ASP has seen a significant increase in recent years helped by a mix shift towards these buyers and this trend will likely continue in FY2022 as the average price of homes in the company’s backlog ($596k as of Q3 2021 end) is much higher than the ASP it is currently realizing for in its home closing revenues ($533k as of Q3 2021 end).
Recovering Community Count
The company’s average community count took a substantial hit in recent years due to the unprecedented rise in demand and William Lyon’s high backlog at the time of the merger. The company’s average active communities declined from 411 at the end of Q2 2020 to 332 at the end of Q2 2021. However, the company has invested aggressively in land acquisition and development which will help its active community count going forward. Based on trailing twelve-month home closings, management estimated that the company had a lot position of 4 years of owned supply and 6.2 years of total supply as of Q3 2021 end.
The company’s average community count increased slightly from 332 in Q2 2021 to 338 in Q3 2021. I believe the company’s active community count can reach back to 400 plus levels over the next couple of years.
Digitalization of home buying to reduce selling expenses
The company has invested in the digitalization of the home buying experience in recent years. Post-Covid, they have introduced an online offering that enables consumers to reserve ready-to-move-in homes as well as select their home-site, floor plans, and design for their build-to-order home purchases. It also enables customers to purchase already completed or inventory homes. TMHC is receiving a positive response from consumers for the same.
The company opened a first-of-its-kind digital community – Venture – on October 1st, 2021. The consumer has an option of either touring the model home virtually or using a hybrid of virtual and self-guided tours before completing the purchase online in this community. This model has received a good response and, from opening its model home till its last quarter earnings call, it received an overwhelmingly positive response with an interest list of more than 1300 prospective buyers and a reservation to the sales conversion rate that is two-and-a-half times higher than the company’s average despite no in-person sales team and lower-than-normal external broker participation rates. With similar results across each of its virtual capabilities, the company can see a meaningful reduction in selling expenses in the longer term.
Forecast and Valuations
On its last quarter earnings call, management guided for the average active community between 335 and 340 for FY2021 and I have assumed it near the high-end for my forecast. The company is aggressively investing in buying and developing land with a total investment in land acquisition and development for FY2021 expected to be ~$2 bn. I believe this will help the company ramp up its community count aggressively over the next two years and I have assumed the company will reach 400 average active community count in FY2023.
The company reported a healthy absorption (net sales per community per month) of ~3.3 in Q3 2021 despite its self-imposed sales restriction in the majority of communities. For the full-year 2021, absorption is expected to be ~3.6 thanks to the very strong spring season last year. I believe the company’s full-year absorption will slow down to 3.3 in FY2022 and 3.1 in FY2023 thanks to an anticipated increase in the interest rates.
For ASP, I have modeled a continued increase in FY2022 as more higher-priced backlog gets converted followed by a slight decrease in FY2023 as the company tries to keep its offering in an affordable range. This gives us the following estimates for the home closing revenues.
For gross margins, I am expecting a meaningful increase as the current higher-priced backlog starts getting converted into revenues. This is somewhat akin to what we have seen with recent KB Home (KBH) results and guidance. In addition, the company’s SG&A as a percentage of revenue will decrease helped by merger synergies, leverage from higher revenues, and the use of digital capabilities reducing selling cost. I have assumed gross margin to increase to mid-20s by FY2023 from low-20s in FY2021, and SG&A as a % of sales to be around 9.2% for FY2022 and FY2023. This gives us the following P&L for the company.
The company’s tangible book value per share (TBVPS) is currently around $24.60. Using our earnings forecast, the company’s FY2023-end TBVPS will come around at ~$43.45 (We have used approximation FY2023-end TBVPS = Q3 2021 end TBVPS + Q4 2021e EPS + FY2022 EPS + FY2023 EPS.)
The stock is trading at ~1.24x P/TBV. Even if we are conservative and assume a ~1.1x P/TBV multiple, we get a ~$47.80 target price or ~56.70% upside from the current levels over the next two years.
The biggest risk for the company and homebuilding sector, in general, is the impact of interest rate increases on demand. While we have assumed absorption to decrease over the coming years because of rising interest rates, if the impact is more severe than what we have estimated, our price target may prove optimistic.