Toll Brothers (TOL) Up 78% Over a Year: More Room to Run?
There’s no denying that the U.S. housing data was weak for May as challenges like inventory shortage, rising material costs and accelerating home prices have been taking a toll on the industry despite a low borrowing rate environment.
Nonetheless, builders are witnessing higher demand amid the COVID 19 pandemic, with Americans seeking more space for offices and classrooms. Also, an improving labor market scenario and solid economic backdrop will somewhat offset the prevailing headwinds.
Toll Brothers Inc. TOL is one such company that continues to display strength in several areas. Adding the stock to your portfolio should not be a disappointment. The company mostly caters to luxury move-up buyers who already possess a residence but are looking to shift to larger and better homes. These homebuyers are less sensitive to price changes. Toll Brothers enjoys greater pricing power than other homebuilding companies.
Shares of Toll Brothers have gained 78.2% over the past year compared with the industry’s 48.6% rally. Earnings estimates for Toll Brothers have exhibited an uptrend, reflecting optimism in the stock’s prospects. The Zacks Consensus Estimate for the company’s earnings for the current year has moved up 1.8% over the past 30 days. Also, estimates for fiscal 2022 have climbed 2% over the same time frame. Let us delve deeper into other factors that make this Zacks Rank #1 (Strong Buy) stock a lucrative pick at the moment. You can see the complete list of today’s Zacks #1 Rank stocks here.
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What Makes the Stock an Attractive Pick?
Acquisitions: Given significant pent up housing demand, Toll Brothers has secured some of the most sought-after urban locations in the country, where land is scarce and approvals are not easy to obtain. Toll Brothers is making use of its strong liquidity position to secure the most sought-after urban locations in the country like New York City Market, Northern New Jersey, Washington DC and Philadelphia. The company’s solid land position places it well to meet the growing demand in these regions, thus giving it a competitive edge over peers who are presently facing land availability constraints.
In September 2020, Toll Brothers expanded into the Colorado Springs market through the acquisition of Keller Homes, one of the top private home building companies in Colorado Springs. Colorado Springs is a dynamic housing market, which complements Toll Brothers’ operations in metro Denver and Fort Collins.
The company’s extensive geographic footprint and deep land position will allow it to grow its community count in fiscal 2021 and 2022, attributable to faster-than-anticipated sale of existing communities. Management is now targeting community count growth of 310 for third-quarter fiscal 2021 and 340 for fiscal 2021, which will reflect accelerating land acquisition and development to meet the resurgence in homebuyer demand.
Favorable Industry Backdrop: New single-family homes’ demand has seen a V-shaped recovery throughout the country and Toll Brothers is not an exception. A combination of lower interest rates and rising need for more work-at-home space positively impacted the industry, thereby helping the company deliver solid performance.
For second-quarter fiscal 2021, its net signed contracts or orders were up 84.9% year over year. Also, backlog grew 57.2% year over year to 10,104 homes.
Solid Prospects: Toll Brothers has solid prospects, as is evident from the Zacks Consensus Estimate for earnings of $5.74 per share for the current year and next, indicating 68.8% and 43% year-over-year growth, respectively. Meanwhile, the company’s sales are expected to increase 22.3% in the current year and 18.8% in the next.
Other Stocks to Consider
Other top-ranked stocks in the same space include M.D.C. Holdings, Inc. MDC, Lennar LEN and Meritage Homes Corporation MTH. While M.D.C. Holdings and Lennar each sport a Zacks Rank #1, Meritage Homes carries a Zacks Rank #2 (Buy).
M.D.C. Holdings’ earnings for 2021 are likely to increase 59.4%.
Lennar’s fiscal 2021 earnings are likely to grow 73.4%.
Meritage Homes has expected earnings growth rate of 32.9% for 2021.
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Toll Brothers Inc. (TOL) : Free Stock Analysis Report
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