Rating Update: Stock Rating A-Highest (1/19/24)-Taylor Morrison Home Corporation (TMHC).

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BUSINESS

Taylor Morrison Home Corporation, together with its subsidiaries, operates as a public homebuilder in the United States. The company designs, builds, and sells single and multi-family detached and attached homes; and develops lifestyle and master-planned communities. It also develops and constructs multi-use properties consisting of commercial space, retail, and multi-family properties under the Urban Form brand name; and offers title insurance and closing settlement services, as well as financial services. In addition, the company operates under the Taylor Morrison, William Lyon Signature, and Darling Homes brand names in Arizona, California, Colorado, Florida, Georgia, Nevada, North and South Carolina, Oregon, Texas, and Washington. Taylor Morrison Home Corporation was founded in 1936 and is headquartered in Scottsdale, Arizona.
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INVESTMENT RATING

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TMHC is expected to continue to be an important Value Builder reflecting capital returns that are forecasted to be above the cost of capital.

Taylor Morrison Home has a current Value Trend Rating of A (Highest Rating).
This rating combines highly consistent signals from two proprietary PTR measures of a stock’s attractiveness. Taylor Morrison Home has a good Power Rating of 78 and a good Appreciation Score of 82, resulting in the Highest Value Trend Rating.

Taylor Morrison Home’s stock is selling well below targeted value. The current stock price of $56.00 compares to targeted value 12 months forward of $149.
Taylor Morrison Home’s high appreciation potential results in an appreciation score of 82 (only 18% of the universe has greater appreciation potential.)
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Taylor Morrison Home has a Power Rating of 78. (TMHC’s good Power Rating indicates that it has a higher likelihood of achieving favorable investment performance over the near to intermediate term than all but 22% of companies in the universe.)
Factors contributing to this good Power Rating include: the Operative Builders comparison group is in an extremely strong phase currently; and recent price action has been favorable. An offsetting factor is earnings estimate behavior for TMHC has been slightly negative recently.

INVESTMENT PROFILE

TMHC’s financial strength is exceptional. Financial strength rating is 93.
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Relative to the S&P 500 Composite, Taylor Morrison Home Corporation has moderate Value characteristics; its appeal is likely to be to Capital Gain-oriented investors; the perception is that TMHC is normal risk. Low financial leverage is a positive for TMHC. Relative weaknesses include: low historical profitability, and high stock price volatility. TMHC’s valuation is low: low dividend yield, low P/E ratio, and low price/book ratio. TMHC has unusually low market capitalization.

CURRENT SIGNALS

Taylor Morrison Home’s current operations are stable. Return on equity is rising, reflecting: improving asset utilization; widening pretax margins; and rising leverage.

Taylor Morrison Home’s current technical position is very strong. The stock price is in a 2.8 month up move. The stock has appreciated 42.5% from its prior low. The stock price is above its 200 day moving average which is in an uptrend.

ALERTS

Taylor Morrison Home Corporation (NYSE: TMHC) has recently enjoyed slight positive changes in fundamentals: significant quarterly earnings acceleration occurred.
In light of this new information we are reviewing our current Overall Rating of A. This review will be completed in the next several days.
Taylor Morrison Home Corporation (NYSE: TMHC) has reported earnings for its fourth fiscal quarter (ending December 31) of $1.61 versus $2.54 for the same period a year ago. For the latest four quarters through December 31, E.P.S. were $7.09 versus $9.16 for the same period a year ago.
Taylor Morrison Home Corporation (NYSE: TMHC) stock enjoyed a very large increase of 5.6% on 2/14/24. The shares closed at $56.00. Moreover, this advance was accompanied by unusually high trading volume at 167% of normal. Relative to the market the stock has been strong over the last nine months and has risen 7.2% during the last week.

CASH FLOW

In 2022, Taylor Morrison Home experienced a significant decline in cash of -$110 million (-13%). Sources of cash were lower than uses. Cash generated from 2022 EBITDA totaled +$1,457 million. Non-operating sources contributed +$100 million (+7% of EBITDA). Cash taxes consumed -$336 million (-23% of EBITDA). Re-investment in the business amounted to -$7 million (-1% of EBITDA). On a net basis, debt investors withdrew -$974 million (-67% of EBITDA) while equity investors pulled out -$348 million (-24% of EBITDA).
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TMHC’s Non-operating Income, %EBITDA has enjoyed a very strong overall uptrend over the period. This improvement was accompanied by stability for the Taylor Morrison Home Peer Group. In most years, Taylor Morrison Home was in the lower quartile and top quartile. Currently, Taylor Morrison Home is above median at +7% of EBITDA (+$100 million).

TMHC’s Cash Taxes, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by an uptrend for the Taylor Morrison Home Peer Group. (Since 2020 Cash Taxes, %EBITDA has experienced a sharp decline.) In most years, Taylor Morrison Home was in the second quartile and third quartile. Currently, Taylor Morrison Home is substantially below median at -23% of EBITDA (-$336 million).

TMHC’s Business Re-investment, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by an opposite trend for the Taylor Morrison Home Peer Group. (Since 2020 Business Re-investment, %EBITDA has experienced a very sharp recovery.) In most years, Taylor Morrison Home was in the top quartile and lower quartile. Currently, Taylor Morrison Home is above median at -1% of EBITDA (-$7 million).

TMHC’s Debt Investors, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Taylor Morrison Home Peer Group. (Since 2020 Debt Investors, %EBITDA has accelerated very sharply.) In most years, Taylor Morrison Home was in the top quartile and lower quartile. Currently, Taylor Morrison Home is lower quartile at -67% of EBITDA (-$974 million).

TMHC’s Equity Investors, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Taylor Morrison Home Peer Group. In most years, Taylor Morrison Home was in the top quartile and third quartile. Currently, Taylor Morrison Home is below median at -24% of EBITDA (-$348 million).

TMHC’s Change in Cash, %EBITDA has exhibited a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Taylor Morrison Home Peer Group. (Since 2020 Change in Cash, %EBITDA has experienced a very sharp decline.) In most years, Taylor Morrison Home was in the top quartile and lower quartile. Currently, Taylor Morrison Home is below median at -8% of EBITDA (-$110 million).
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TMHC’s Cash, %Revenue has exhibited little to no overall change over the period. This stability was accompanied by stability for the Taylor Morrison Home Peer Group as well. In most years, Taylor Morrison Home was in the third quartile and top quartile. Currently, Taylor Morrison Home is substantially below median at +9%.

PROFITABILITY

TMHC’s return on equity has improved very significantly since 2013. The current level of 16.9% is 1.55X the low for the period and is -25.7% from the high.
The key to the story for TMHC is a very strong positive trend in pretax operating return significantly offset by a very strong negative trend in non-operating factors.
The productivity of TMHC’s assets rose over the full period 2013-2023: asset turnover has enjoyed a strong overall uptrend.
Reinforcing this trend, pretax margin enjoyed a very strong overall uptrend that accelerated very sharply from the 2020 level.
Non-operating factors (income taxes and financial leverage) had a significant negative influence on return on equity.
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TMHC’s return on equity is at the upper quartile (16.9%) for the four quarters ended September, 2023.
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Operating performance (pretax return on assets) is above median (13.8%) reflecting asset turnover that is at the lower quartile (0.94X) and pretax margin at the upper quartile (14.7%).
Tax “keep” rate (income tax management) is at the lower quartile (75.1%) resulting in after tax return on assets that is above median.
Financial leverage (leverage) is at median (1.64X).

GROWTH RATES

There are no significant differences between Taylor Morrison Home’s longer term growth and growth in recent years.
Taylor Morrison Home’s historical income statement growth and balance sheet growth have diverged. Revenue growth has paralleled asset growth; earnings growth has exceeded equity growth.

Annual revenue growth has been -3.4% per year. (More recently it has been 13.9%.)

Total asset growth has been -6.6% per year. (More recently it has been 10.5%.)

Annual E.P.S. growth has been 18.9% per year.

Equity growth has been 13.0% per year. (More recently it has been 17.4%.)

Taylor Morrison Home’s consensus growth rate forecast (average of Wall Street analysts) is -14.8% — substantially below the average of the historical growth measures.
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Relative to the Taylor Morrison Home Peer Group, Taylor Morrison Home’s historical growth measures are erratic. Equity growth (13.0%) has been upper quartile. E.P.S. growth (18.9%) has been at the upper quartile. Revenue growth (-3.4%) has been lower quartile. Total asset growth (-6.6%) has been lower quartile.

Consensus growth forecast (-14.8%) is lower quartile.
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PRICE HISTORY

Over the full time period, Taylor Morrison Home’s stock price performance has been variable and below market. Between April, 2013 and February, 2024, Taylor Morrison Home’s stock price rose +117%; relative to the market, this was a -31% loss. Significant price moves during the period: 1) September, 2022 – June, 2023: +109%; 2) March, 2020 – April, 2021: +184%; 3) September, 2019 – March, 2020: -58%; and 4) January, 2016 – January, 2018: +111%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of 45.6% is upper quartile relative to the S&P 500 Composite.
In addition to being upper quartile relative to S&P 500 Composite, current annual total return performance through January, 2024 of 45.6% is at median relative to Taylor Morrison Home Corporation Peer Group.

Current 5-year total return performance of 22.5% is upper quartile relative to the S&P 500 Composite.
Through January, 2024, with upper quartile current 5-year total return of 22.5% relative to S&P 500 Composite, Taylor Morrison Home’s total return performance is at median relative to Taylor Morrison Home Corporation Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, TMHC’s overall valuation is exceptionally low. Four of five factors are lower quartile. The highest factor is the ratio of enterprise value/assets, followed by the price/equity ratio, then by the ratio of enterprise value/earnings before interest and taxes, then by the price/earnings ratio. The lowest factor, ratio of enterprise value/revenue, is lower quartile.

Relative to Taylor Morrison Home Peer Group, TMHC’s overall valuation is quite low. The highest factor, the ratio of enterprise value/assets, is at the lower quartile. Ratio of enterprise value/revenue is at the lower quartile. Price/equity ratio is lower quartile. Price/earnings ratio is lower quartile. The lowest factor, the ratio of enterprise value/earnings before interest and taxes, is lower quartile.
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Taylor Morrison Home has a major value gap compared to the median valuation. For TMHC to rise to median valuation, its current ratio of enterprise value/revenue would have to rise from the current level of 1.03X to 1.34X. If TMHC’s ratio of enterprise value/revenue were to rise to 1.34X, its stock price would be lower by $23 to $79.
For TMHC to hit lower quartile valuation relative to the Taylor Morrison Home Peer Group, its current ratio of enterprise value/revenue would have to fall from the current level of 1.03X to 1.02X. If TMHC’s ratio of enterprise value/revenue were to fall to 1.02X, its stock price would decline by $-0 from the current level of $56.

VALUE TARGETS

TMHC is expected to continue to be an important Value Builder reflecting capital returns that are forecasted to be above the cost of capital.
Taylor Morrison Home’s current Price Target of $150 represents a +167% change from the current price of $56.00.
This high appreciation potential results in an appreciation score of 82 (only 18% of the universe has greater appreciation potential.)
Reinforcing this high Appreciation Score of 82, the high Power Rating of 78 contributes to an Value Trend Rating of A.
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Taylor Morrison Home’s current Price Target is $150 (-16% from the 2022 Target of $178 but +167% from the 02/14/24 price of $56.00). This slight fall in the Target is the result of a +4% increase in the equity base and a -19% decrease in the price/equity multiple. The forecasted decline in return on equity has a very large negative impact on the price/equity multiple and the forecasted decline in growth has a very large negative impact as well. Partially offsetting these Drivers, the forecasted decline in cost of equity has a very large positive impact.
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PTR’s return on equity forecast is 13.5% — slightly below our recent forecasts. Forecasted return on equity enjoyed a dramatic, erratic increase between 2014 and 2022. The current forecast is above the 2016 low of 9%.

PTR’s growth forecast is 10.0% — significantly below our recent forecasts. Forecasted growth suffered a dramatic, erratic decline between 2014 and 2022. The current forecast is significantly below the 2014 peak of 34%.

PTR’s cost of equity forecast is 8.1% — slightly below recent levels. Forecasted cost of equity enjoyed a dramatic, erratic decline between 2014 and 2022. The current forecast is well below the 2015 peak of 13.4%.
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At Taylor Morrison Home’s current price of $56.00, investors are placing a positive value of $7 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 21.0% per year, and a return on equity of 17.9% versus a cost of equity of 11.5%.
PTR’s 2024 Price Target of $150 is based on these forecasts and reflects an estimated value of existing assets of $74 and a value of future investments of $76.

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