Toll Brothers Inc.

After missing estimates in five of the last six quarters, Toll Brothers Inc. (TOL - Snapshot Report) delivered a huge earnings surprise of 150% in its fiscal second quarter 2012, benefiting largely from a recovering housing market. In fact, its stock price has more than doubled since October 2011 when the housing market was down.

This luxury homebuilder became a Zacks #1 Rank (Strong Buy) stock on May 26, 2012 on the heels of a commendable fiscal first quarter earnings performance and subsequent estimate revisions.

The company enjoys the competitive advantage of being the largest luxury home builder in the country with little competition in this niche.

Strong Second Quarter

On May 23, Toll Brothers announced solid fiscal second quarter results, marking a turnaround from the past few lukewarm quarters. Earnings of 10 cents per share easily surpassed the loss of 12 cents last year. The improvement was driven largely by higher revenues. The Zacks Consensus Estimate was expecting only 4 cents.

Revenues rose 17% to $373.7 million, driven by growth in net orders. Net orders grew 47%, fueled by an increase in demand as the overall housing industry recovers. The robust spring selling season and reduced competition in the luxury home market also acted as tailwinds.

Toll Brothers witnessed a broad-based recovery across all the geographic regions in which it operates. Homes delivered increased 14% while the average selling price expanded 2.6% year over year. The company’s adjusted gross margin stood at 23.2%, modestly above prior-year levels.

We believe Toll Brothers will be able to outperform the market, given its well located communities and strong land positions, along with stabilizing home prices, improving consumer confidence and the overall economic recovery.

Estimates Climbing

The Zacks Consensus Estimate for the fiscal year ending October 2012 has gone up 26.5% to 43 cents in the last 60 days, while the fiscal year ending October 2013 moved higher by more than 17% to 88 cents in that time.

Expensive Valuation

Toll Brothers currently trades at a forward price-to-earnings (P/E) of 68.8x, reflecting a 179% premium to the peer group average of 24.62x. Also, the stock has a trailing 12-month return on equity (ROE) of 1.2%, which is below its peer group average of 3.5%. However, the stock is trading in line with the peer group on a price-to-book (P/B) value basis. The P/B multiple for both the stock as well as the peer group is at 1.88.

Chart Showing Consistent Rise

Shares of Toll Brothers have been mostly rising since mid-October 2012. It reached its 52-week high of $29.75 on June 29. Moreover, the stock is currently trading above its 50- and 200-day moving averages, which stand at $26.10 and $21.93, respectively. In fact, the stock has been consistently trading above its 200-day moving average since the end of November 2011 and above its 50-day moving average since June 25, 2012.

Volume is very strong, averaging roughly 4145K daily. Toll Brothers has outperformed the S&P 500 over the past six months. The year-to-date return for the stock is 45.6% compared with 8.31% for the S&P 500.

Based in Horsham, Pennsylvania, Toll Brothers designs, builds, markets, and arranges financing for luxury single-family and attached-home communities and master-planned luxury multi-product golf course communities on the land it develops or improves. The company has a market cap of $4.96 billion.