Yahoo Finance Here's Why Investors Should Retain Toll Brothers (TOL) Stock
Toll Brothers, Inc. TOL is benefiting from strong demand for new homes, driven by a resilient economy and a significant housing supply shortage. Also, the emphasis on affordable luxury communities, build-to-order model and land acquisition strategies bode well.
This Zacks Rank #3 (Hold) company’s shares have surged 55.5% in the past year compared with the Zacks Building Products - Home Builders industry’s 33.9% growth. However, high mortgage rates and higher land and labor costs are a concern.
The company’s fiscal 2024 earnings and sales are likely to witness growth of 14.2% and 4.6% year over year, respectively. Earnings estimates for the fiscal 2024 have increased 2.8% upward in the past 30 days. This positive trend signifies bullish analysts’ sentiments, indicating robust fundamentals and the expectation of outperformance in the near term.
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This bullish trend justifies the stock’s addition to investors’ portfolios. This homebuilder has a long-term earnings growth rate of 9.5%, which highlights its inherent strength.
Let us discuss the factors highlighting why investors should retain the stock for now.
Growth Catalysts
Focus on Affordable Luxury Homes: TOL primarily offers luxury homes, catering to move-up buyers seeking larger and better homes. During second-quarter fiscal 2024, the company observed strong demand for new homes driven by a resilient economy, favorable demographics and a lack of supply due to underproduction and low resale inventory from higher rates.
Toll Brothers is expanding its luxury brand to new product lines and price points while also adding more affordable luxury communities to meet demographic trends.
The company's strategy of widening price points to include more affordable luxury homes and increasing the supply of spec homes helped grow market share. This strategy reduces cycle times, improves inventory turns, and leverages fixed costs, leading to revenue growth and higher operating margins. With these strategies and a more capital-efficient land strategy, TOL is confident in generating attractive returns in the future.
Build-To-Order Model: The company’s Built-to-Order process provides buyers with a wide range of choices in the major aspects of their future home, meeting the needs of modern buyers seeking a personalized space. At the end of the fiscal second quarter, Toll Brothers’ backlog was 7,093 homes valued at $7.38 billion. For the fiscal 2024, home deliveries are anticipated in the range of 10,400-10,800 units (versus earlier expectations of 10,000-10,500 units). The company believes the fiscal 2024 to be another solid high-margin year. The estimated range reflects growth from 9,597 units in the fiscal 2023.
During the fiscal second quarter, TOL signed 3,041 net contracts for $2.9 billion. This represents an increase of 30% in units and 29% in dollars compared with the year-ago quarter’s levels.
Owing to these outstanding results and continued solid demand at the start of the third quarter, TOL raised its full-year revenue and earnings guidance during the fiscal second-quarter earnings call.
Significant Land Positions: Toll Brothers secured some of the most sought-after urban locations in the country, where land is scarce and approvals are not easy to obtain. The company’s solid land position places it well to meet growing demand in these regions, thus giving it a competitive edge over its peers that are facing land availability constraints.
In the second quarter of fiscal 2024, Toll Brothers spent $472 million on land to purchase approximately 3,470 lots each. At the end of the fiscal second quarter, the company owned and controlled 71,300 lots. In the fiscal 2023, the company spent about $1241.9 million on land to purchase approximately 9,352 lots.
Based on the land the company owns or controls, TOL anticipates 10% growth in community count by fiscal year-end 2024, targeting 410 operating communities.
Concerns
Cyclical Nature of Business: The housing industry is cyclical and influenced by consumer confidence, economic conditions, and interest rates. Government actions on economic stimulus, taxation, and borrowing limits can impact consumer confidence and spending, affecting the housing market. With the Federal Reserve maintaining steady rates, concerns about inflation continue to challenge the sector.
Margin & Supply Constraints: Rising building materials and labor costs are a concern for the company’s margin. Labor shortages are leading to higher wages due to limited availability. This is somewhat denting homebuilders’ margins. Also, higher lumber prices are likely to put pressure the bottom line. Land prices are inflating due to limited availability. This could eat into homebuilders’ margins in the forthcoming quarters.
The company contends with supply constraints. Years of production deficits limit the housing supply. Buildable lots, skilled labor and capital remain scarce for smaller builders. A tightened labor market slows housing production growth.
Key Picks
Some better-ranked stocks in the Zacks Construction sector are:
Howmet Aerospace Inc. HWM carries a Zacks Rank #2 (Buy). HWM has a trailing four-quarter earnings surprise of 8.5%, on average. You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.
The Zacks Consensus Estimate for HWM’s 2024 sales and EPS indicates a rise of 10.6% and 29.9%, respectively, from prior-year levels.
M-tron Industries, Inc. MPTI currently carries a Zacks Rank #2. It has topped earnings estimates in three of the trailing four quarters and missed once, with an average surprise of 26.7%.
The Zacks Consensus Estimate for MPTI’s 2024 sales and earnings per share (EPS) indicates a rise of 8.8% and 58.6%, respectively, from prior-year levels.
Gates Industrial Corporation plc GTES presently carries a Zacks Rank #2. GTES has a trailing four-quarter earnings surprise of 14.9%, on average.
The Zacks Consensus Estimate for GTES’ 2024 sales indicates a 0.2% decline but EPS growth of 2.9% from the prior-year levels.
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Toll Brothers Inc. (TOL) : Free Stock Analysis Report
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