{"id":50544,"date":"2019-11-10T13:05:04","date_gmt":"2019-11-10T21:05:04","guid":{"rendered":"https:\/\/drduru.com\/onetwentytwo\/?p=50544"},"modified":"2019-11-10T13:05:06","modified_gmt":"2019-11-10T21:05:06","slug":"taylor-morrison-makes-a-poorly-timed-acquisition-of-william-lyon","status":"publish","type":"post","link":"https:\/\/drduru.com\/onetwentytwo\/2019\/11\/10\/taylor-morrison-makes-a-poorly-timed-acquisition-of-william-lyon\/","title":{"rendered":"Taylor Morrison Makes A Poorly Timed Acquisition of William Lyon"},"content":{"rendered":"\n

The Timing and the Stock Charts<\/strong><\/h3>\n\n\n\n

During the analyst conference call<\/a> explaining the deal to buy William Lyon Homes (WLH), CEO Sheryl Palmer revealed that Taylor Morrison Home Company (TMHC) began buy-out talks several months ago. That was a time of rising optimism for home builders. The announcement of the deal came shortly after investors sold off the stock in response to the Q3 earnings report<\/a>. TMHC also suffered from a general pullback in sentiment<\/a> right after the iShares Dow Jones Home Construction ETF (ITB) finally finished recovering all its losses from the January, 2018 climactic peak. The deal greased the skids to the tune of a 5.0% loss. Sellers are now pressing TMHC into a critical test of support at its 200-day moving average (DMA). I was very fortunate to take cues from the post-earnings 50DMA breakdown to lock in profits<\/a> on my TMHC position.<\/p>\n\n\n\n

\"Taylor
Taylor Morrison Home Corporation (TMHC) is on the downswing after investors poorly received earnings and then an M&A announcement. Almost 4 months of gains have quickly evaporated as TMHC faces down a 200DMA test.<\/figcaption><\/figure><\/div>\n\n\n\n
\"William
William Lyon Homes (WLH) struggled to make more progress after its May post-earnings gap up. The stock price also barely responded to the take-out offer from Taylor Morrison.
Source for charts: FreeStockCharts<\/strong><\/figcaption><\/figure><\/div>\n\n\n\n

The stock chart for WLH is very striking and telling. While most home builders raced this year to erase the losses from their climactic January, 2018 peaks, WLH essentially stalled after May. At the October high, WLH was up 105% from the climactic December low. However, WLH imploded so much in 2018 that the October peak was STILL about 33% off the January top. In other words, WLH looks like damaged goods being bought at a necessary discount. For comparison, TMHC at its October peak was up 82% from its December low (which was actually not quite as low as the October, 2018 low), and exactly matched its January, 2018 peak (like ITB). <\/p>\n\n\n\n

The Doubts<\/strong><\/h3>\n\n\n\n

Several analysts on the call expressed subtle and not-so-subtle skepticism about the wisdom and pricing of the deal. Taylor Morrison bragged about the book value acquisition price for William Lyon, but that cheap price also suggested a bit of desperation from William Lyon to sell itself. Indeed, one analyst claimed that it was no secret that William Lyon was on the market. At the time of writing, WLH is trading at a 12.5 trailing P\/E, 8.9 forward P\/E, 0.4 price\/sales, and 0.8 price\/book. This valuation is recession-level pricing. TMHC trades at 11.4 trailing P\/E, 7.0 forward P\/E, 0.5 price\/sales, and 0.9 price\/book. This valuation is also surprisingly low. (All valuations from Yahoo Finance<\/a>). The combination of strong financial performance and cheap valuation got me into TMHC. Yet this combination of low-valued companies does not seem poised to create a premium the market is willing to pay.<\/p>\n\n\n\n