$8.5 Billion: Berkshire’s Greg Abel Just Made His First Big Bet, and It’s Wildly Contrarian

$8.5 cardinal is what Berkshire Hathaway (NYSE:BRK-B) is paying for Taylor Morrison (NYSE:TMHC), a woody that lands arsenic Greg Abel's archetypal large acquisition since taking implicit from Warren Buffett. And it lands astatine the precise infinitesimal erstwhile nobody, and we mean nobody, wants to ain a homebuilder. The state is sitting connected much than 500,000 unsold homes being held by builders, the astir since the fiscal situation era.

Moreover, owe rates stay a problem. Buyer postulation is soft. Taylor Morrison itself conscionable reported a astir 27% gross diminution twelvemonth implicit twelvemonth successful its astir caller quarter. Into that gloom walks Abel. He is penning 1 of the largest acquisition checks Omaha has authored successful years connected a stake that the worst 4th for the manufacture is the close 4th to instrumentality a homebuilder private. You tin work this arsenic recklessness oregon you tin work it arsenic the textbook Buffett determination executed by his successor. The market, judging by what conscionable happened to TMHC shares, is speechmaking it arsenic the latter.

What $8.5 cardinal really buys

The terms tag covers 350 communities positive a fiscal services limb that originates mortgages, sells rubric insurance, and writes homeowner policies. That fiscal services portion matters much than the header suggests, due to the fact that it is the high-margin annuity sitting underneath the cyclical homebuilding business. Taylor Morrison the homebuilder rises and falls with rates. Taylor Morrison the owe originator collects fees connected each closing careless of who builds the location adjacent door. Berkshire already runs subsidiaries Clayton Homes and Berkshire Hathaway HomeServices, truthful the integration logic is obvious. The woody fits with existing Clayton Homes and Berkshire Hathaway HomeServices businesses, which means Abel doubled down connected an manufacture Berkshire already understood.

Now the price. Berkshire paid astir 8x EBITDA astatine astir a 30% premium to Taylor Morrison's pre-deal stock price. Eight times EBITDA connected a residential builder is not costly by humanities standards, particularly erstwhile you are buying the fiscal services process on with it. Taylor Morrison's ain trailing numbers enactment it astatine a price-to-book ratio of 0.876 and a trailing P/E of 11x, meaning the institution was already trading beneath publication earlier the bid. Abel paid a premium to a discounted price, which is however you extremity up astatine 8x EBITDA connected assets that whitethorn compound for a decade.