Undeniably, the U.S. housing market has been grappling with softness in demand, in response to affordability challenges and general market uncertainty. Nonetheless, builders are optimistic about the industry’s overall outlook, and believe that healthy economy and strong job market will help the demand side of the equation.
Taylor Morrison Home Corporation TMHC is one of the homebuilders that has managed to navigate smoothly. Shares of this homebuilding company have gained almost 35% year to date compared with the industry’s 28.1% growth. Also, it has outperformed the S&P 500’s 18.2% rise in the said period. The price performance is backed by Taylor Morrison’s impressive earnings surprise history. Notably, the company’s earnings surpassed analysts’ expectations in all the trailing six quarters.
Hence, this homebuilder is one such company that continues to display strength in several areas. Adding the stock to your portfolio should certainly not be a disappointment. Earnings estimates for Taylor Morrison have exhibited an uptrend, reflecting optimism in the stock’s prospects. The Zacks Consensus Estimate for the company’s 2019 and 2020 earnings has moved up 0.8% and 0.7%, respectively, over the past 60 days. Let us delve deeper into other factors that make this Zacks Rank #2 (Buy) stock a profitable pick. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
What’s Working in Favor of the Stock?
Inorganic Efforts Bode Well: The company follows a systematic inorganic strategy for expansion and has wrapped up a wide array of acquisitions that contributed significantly to growth. The most recent acquisition of AV Homes, Inc., a homebuilder and land developer of residential communities in Florida, North and South Carolina, Arizona and Texas.. Meanwhile, the company’s other acquisitions include JEH Homes, an Atlanta based homebuilder; three divisions of Orleans Homes in markets within Charlotte, Chicago and Raleigh; and Acadia Homes in Atlanta. Each of these buyouts represent its strategic approach in expanding geographic footprint in high-growth markets.
Solid Performance & Upbeat View: Taylor Morrison recently delivered solid first-quarter 2019 results, wherein it topped expectations in all metrics including orders, deliveries, gross profit and SG&A. Amid challenging housing market scenario, the company’s home closings of 1,938 were up 25.3% year over year in the quarter and increased more than 20% across each of the segments. Net sales orders were up 7%, positively impacted by the acquisition of AV Homes.
The company expects absorption pace to be in line with that of the last year. This would imply an acceleration of order pace in the coming quarters. Overall, we expect the company to realize higher levels of synergies from the AV Homes acquisition and face easier comps in the second half of 2019.
Markedly, it serves a wide array of consumer groups from coast to coast, including first-time, move-up, luxury and 55 plus buyers. First time, first-time move up and 55-plus segments have improved the company’s competitive position in each of the markets, leading to improved profitability and cash flow generation. In the first quarter, these three segments represented nearly 90% of its closings, reflecting approximately 500-basis point improvement from the prior-year quarter.
Superior ROE: Taylor Morrison’s return on equity (ROE) is indicative of growth potential. The company's ROE of 12.9% compares favorably with the industry's average of 12.3%, implying that it is efficient in using its shareholders' funds.
Valuation: Because of homebuilders’ asset-driven nature, it makes sense to value them based on the price-to-book (P/B) ratio. The company currently has a trailing 12-month P/B ratio of 0.98. This is lower than the current P/B of the industry and S&P 500 that are pegged at 1.26 and 4.12, respectively. Its lower-than-market positioning indicates that there is room for an upside in the quarters ahead, substantiating the Value Score of B.
Other Stocks to Consider
Other top-ranked stocks in the Construction sector include KBR, Inc. KBR, Jacobs Engineering Group Inc. JEC and Quanta Services, Inc. PWR, each carrying a Zacks Rank #2 (Buy).
KBR surpassed earnings estimates in all the trailing four quarters, with the average being 8.9%.
Jacobs has a three-five year expected EPS growth rate of 12%.
Quanta Services’ earnings for the current year are expected to increase 29.5%.
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