Key points
- The U.S. housing market is poised to experience another construction boom soon, just in time for the Fed’s interest rate cuts.
- While most housing stocks have likely reached their full potential, one still offers a discount: Taylor Morrison.
- Analysts like the story and recent fundamental trends argue that the stock will continue to rise in the near future.
- 5 titles we like most by Taylor Morrison Home
The US housing market is just recovering from the recent scare. According to data from Intercontinental Exchange Inc., most homeowners currently hold mortgages at rates of around 3.2%, and only a few are willing to forego this generationally low financing rate.
On the buyer side, few potential homeowners are willing to finance a new property at today’s mortgage rates, which hover around 7.3%. The median home price has increased as much as 31% since the COVID-19 pandemic to a price range of $492,300.
Let’s assume that no one wants to sell their cheaply financed property and that few can afford a much more expensive home at high rates. In that case, the only way out of this stagnant market is to build a way out of the freeze with new inventory.
Stocks like DR Horton Inc. and PulteGroup Inc. hit new all-time highs and have flirted with those levels ever since. However, their P/E valuations have reached levels higher than the average multiples of the residential construction sector Taylor Morrison Home Co. New York Stock Exchange: TMHC and its current valuation is the only sensible value left in the construction industry.
Buffett got it right again
After purchasing DR Horton and other residential construction stocks, Warren Buffett let the rest of the market know that a residential construction boom may be on the way.
He has been right so far, as US building permits have sustained their upward trend in the latest quarter. These permits will eventually turn into housing units, helping to untie the current real estate market. These homebuilders could be preparing for a successful quarter, as the preparation window is closing.
According to CME’s FedWatch tool, traders have now priced in potential Fed rate cuts for May or June 2024. With less than a few months of preparation, investors could save a lot of time by finding the gap that needs to be filled by Taylor Morrison. Lower interest rates could help mortgage rates fall, giving investors near-perfect timing for new housing units to hit the market as the Fed prepares to cut lending rates.
Taylor Morrison is motivated by fundamentals
By taking the most wishful thinking out of this potential opportunity, investors can focus on what really matters for housing stocks: net new orders. New orders are the industry’s key performance indicator (KPI) and how Wall Street decides which stocks to reward.
For Taylor Morrison, Q4 2023 financial results show a 30% jump in net orders. Additionally, revenue from home closings totaled $7.2 billion, including 11,495 closings at an average price of $623,000.
A booming or contracting economy makes no difference in this price range, which is higher than the national average. Buyers looking to enter the real estate market at these price levels are not concerned about the economic cycle. However, lower rates certainly won’t hurt demand.
While DR Horton’s new orders increased 35% and PulteGroup’s 57%, outpacing Taylor Morrison’s, revenue remains the focus. DR Horton generated $7.7 billion, on par with Taylor Morrison. PulteGroup’s $4.2 billion in revenue proves that quantity isn’t much without quality. Because Taylor Morrison’s sales quality is higher (as seen in higher revenue numbers despite lower order growth), its price-to-sales (P/S) multiple should be great, but it isn’t.
Wall Street likes the Taylor Morrison story
At a valuation of 0.9x P/S, the market may have overlooked Taylor Morrison due to its $6.6 billion market cap. Willing to pay a much higher valuation of 1.5x P/S, investors may have found safety in DR Horton’s $54.6 billion size. The same goes for PulteGroup’s 1.6x valuation; a market capitalization of $25.5 billion ruled the roost.
However, there must be a reason why analysts at Royal Bank of Canada raised their price targets for Taylor Morrison shares to $61 per share, predicting a 5% upside from today’s price. Barclays analysts believe the stock could also reach $60. Since these targets were assigned in February 2024, they must still reflect the current state and the trend that potential interest rate cuts could have on the company’s financials.
Before you consider Taylor Morrison Home, you’ll want to hear this.
MarketBeat tracks daily Wall Street’s highest-rated and best-performing research analysts and the stocks they recommend to their clients. MarketBeat identified the five stocks that top analysts are quietly whispering to their clients to buy now before the broader market takes hold… and Taylor Morrison Home wasn’t on the list.
While Taylor Morrison Home currently has a “Hold” rating among analysts, top analysts believe these five stocks are better buys.
View the five stocks here
Are you thinking about investing in Meta, Roblox or Unity? Click the link to find out what streetwise investors need to know about the metaverse and public markets before making an investment.
Get this free report