Land Banking And Diverse Homes Will Strengthen Future Prospects

Key Takeaways

• Emphasizing a diverse portfolio and strategic pricing, Taylor Morrison aims to sustain margins and revenue amidst rising interest rates and affordability issues.
  
• Strategic land management and share repurchases are expected to enhance long-term profitability, cash flows, and shareholder value.
  
• Rising interest rates, land cost inflation, and market competition could strain margins and profitability, amidst uncertain tariffs affecting construction costs.

Catalysts

Operates as a land developer and homebuilder in the United States.

• Taylor Morrison's land portfolio strategy emphasizes controlling a higher percentage of their lot supply through options and off-balance-sheet structures, anticipating greater returns on invested capital and supporting growth while managing risks. This is likely to impact future earnings and return on equity.
  
• The company is strategically managing its pricing and incentives, with a focus on personalized finance incentives and a national base price increase to improve customers' purchasing power without significantly impacting margins. This approach is expected to stabilize and enhance net margins.
  
• Taylor Morrison's focus on high-margin to-be-built homes, as well as their diverse portfolio of entry-level, move-up, and resort lifestyle homes, allows them to maintain healthy gross margins even amid rising interest rates and affordability challenges. This diversity is anticipated to sustain future revenue and margins.
  
• Investments in self-development of raw land and utilizing land banking, seller financing, and joint ventures are expected to reduce capital expenses and enhance operational efficiencies, which could positively affect profitability and cash flows in the long term.
  
• The company's commitment to substantial share repurchases, targeting $300 million to $350 million in 2025, reflects confidence in its future earnings growth and is expected to drive EPS (earnings per share) higher, benefiting shareholder value.

Taylor Morrison Home Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Taylor Morrison Home's revenue will grow by 3.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.8% today to 11.1% in 3 years time.
• Analysts expect earnings to reach $1.0 billion (and earnings per share of $10.66) by about March 2028, up from $883.3 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.1x on those 2028 earnings, up from 6.8x today. This future PE is lower than the current PE for the US Consumer Durables industry at 10.2x.
• Analysts expect the number of shares outstanding to decline by 3.81% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.27%, as per the Simply Wall St company report.

Taylor Morrison Home Future Earnings Per Share Growth

Risks

• Rising interest rates may negatively affect home buyer affordability, which could reduce net sales orders and put pressure on margins.
  
• The company anticipates an increase in land cost inflation from 4% to 7%, which may reduce gross margins if revenues do not increase proportionately.
  
• Greater competition and rising supply in tertiary markets could lead to pricing pressures and increased incentives, impacting net margins and overall profitability.
  
• Uncertainty around tariffs and potential cost pressures from imported materials could increase construction costs, affecting earnings and gross margins.
  
• Use of financial instruments like land banking, while improving returns, may dilute gross margins by nearly 2%, complicating the balance between minimizing risk and maximizing long-term profitability.

Valuation

• The analysts have a consensus price target of $77.278 for Taylor Morrison Home based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $90.0, and the most bearish reporting a price target of just $55.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $9.0 billion, earnings will come to $1.0 billion, and it would be trading on a PE ratio of 9.1x, assuming you use a discount rate of 9.3%.
• Given the current share price of $58.67, the analyst price target of $77.28 is 24.1% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.