Estimating The Fair Value Of Toll Brothers Inc (NYSE:TOL)
Today I will be providing a simple run-through of the discounted cash flows (DCF) method to estimate the attractiveness of Toll Brothers Inc (NYSE:TOL) as an investment opportunity. If you want to learn more about this method, the basis for my calculations can be found in detail in the Simply Wall St analysis model. Also note that this article was written in May 2018 so be sure check the latest calculation for Toll Brothers here.
Crunching the numbers
I’ve used the 2-stage growth model, which simply means we take in account two stages of company’s growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have perpetual stable growth rate. Firstly, I use the analyst consensus forecast of TOL’s levered free cash flow (FCF) over the next five years and discounted these figures at the rate of 11.96%. When estimates weren’t available, I’ve extrapolated the average annual growth rate over the previous five years, capped at a reasonable level. This resulted in a present value of 5-year cash flow of US$1.65B. Want to know how I calculated this value? Read our detailed analysis here.
Above is a visual representation of how TOL’s earnings are expected to move in the future, which should give you some color on TOL’s outlook. Then, I determine the terminal value, which is the business’s cash flow after the first stage. It’s appropriate to use the 10-year government bond rate of 2.8% as the steady growth rate, which is rightly below GDP growth, but more towards the conservative side. The present value of the terminal value after discounting it back five years is US$3.81B.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is US$5.46B. In the final step we divide the equity value by the number of shares outstanding. This results in an intrinsic value of $35.94, which, compared to the current share price of $42.66, we find that Toll Brothers is fair value, maybe slightly overvalued at the time of writing.
Next Steps:
Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn’t be the only metric you look at when researching a company.
For TOL, I’ve compiled three important factors you should look at:
Financial Health: Does TOL have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
Future Earnings: How does TOL’s growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of TOL? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
PS. The Simply Wall St app conducts a discounted cash flow for every stock on the NYSE every 6 hours. If you want to find the calculation for other stocks just search here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
