The market has finally had time to digest the “what” of Berkshire Hathaway‘s (BRKA 0.50%) (BRKB 0.53%) recently announced decision to acquire homebuilder Taylor Morrison Home (TMHC 0.01%). Now that the dust has settled, it’s time answer the question “why?”
The answer isn’t complicated. It’s obvious if you’re willing to take things at face value.
An unexpected (but smart) acquisition
New Berkshire CEO Greg Abel isn’t wasting any time. Since taking the helm at the beginning of this year, he has steered the conglomerate into a much bigger stake in Alphabet, established a new position in Delta Air Lines, and sold off a bunch of smaller holdings that weren’t making much impact on its overall equity portfolio.
One of Abel’s recent moves that really caught people off guard, however, is the decision in late May to wholly acquire Taylor Morrison for $8.5 billion in cash at a time when America’s homebuilding business isn’t exactly firing on all cylinders. As recent earnings reports from D.R. Horton and PulteGroup verify, demand is tepid, and profits are being pressured.
Taylor Morrison isn’t defying this trend, either. Its first-quarter revenue fell 27% year over year, and per-share earnings were more than halved. Although its backlog grew 23% between fourth and first quarters, it still expects total closings to fall 15% this year.
Image source: Getty Images.
This headwind is arguably already priced into this stock, and then some. Even after Berkshire’s premium offer, it’s still a bargain at only 13.6 times this year’s projected per-share profits of $5.29, before a recovery to roughly $6.50 per share next year.
And that’s perhaps Abel’s attraction. The residential real estate market may be stifled by a combination of rising inflation and nervous consumers, against a backdrop of growing mortgage defaults (the Mortgage Bankers Association reports first-quarter defaults were up sequentially as well as year over year).
But Abel knows what his predecessor Warren Buffett also knew: This is a cyclical headwind that will pass, and the time to act is in the midst of the lull. Or as Buffett so famously put it, “Be fearful when others are greedy and greedy when others are fearful.”
That said, it doesn’t hurt that the U.S. still lacks the number of homes it needs regardless of their price. A report recently posted by the White House suggests the nation needs another 10 million homes more than it currently has. For perspective, the U.S. Census Bureau says fewer than 1.5 million were built last year.
Perfect is the enemy of good
Berkshire is still taking on some risk here. What’s unknown is how long this housing headwind will last, or if it will worsen before it abates. Abel doesn’t seem too concerned about the immediacy of Taylor Morrison’s impact on the conglomerate’s bottom line, though. Like Buffett, his favorite holding period is “forever.”
If it takes a while for the acquisition to start paying off, so be it. He just wanted Berkshire Hathaway to make the move while the entry price was pretty good. Like Buffett, he knows holding out for an even better price could end up costing the company more — or worse, price Berkshire out of the purchase altogether.
