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Toll Brothers (TOL) Surges 83.6% in a Year: More Room to Run?
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As existing homes for sale remain scarce and mortgage rates improve, the housing forecast looks increasingly optimistic as we approach the New Year.
Given these tailwinds, among the industry bellwethers, Toll Brothers Inc. (TOL - Free Report) has been riding high, given the strategy of broadening product lines, price points and geographies. Prudent inorganic drive and the lack of competition in the luxury new home market also act as major tailwinds for this Horsham, PA-based homebuilder.
Shares of this Zacks Rank #3 (Hold) company have gained 83.6% in the past year, outperforming the Zacks Building Products - Home Builders industry’s 65.9% rally. The stock has fared better than the Zacks Construction sector and the S&P 500 Index’s 32.8% and 15.1% rallies, respectively.
Image Source: Zacks Investment Research
The solid price performance was backed by the above-mentioned factors and an impressive earnings surprise history. Its earnings surpassed the Zacks Consensus Estimate in the trailing 14 quarters.
Earnings estimates for fiscal 2024 have moved north to $12.23 per share from $12.08 over the past seven days, depicting analysts’ optimism over the company’s prospects. This bullish trend justifies the stock’s addition to investors’ portfolios.
Let’s delve into the driving factors.
Build-to-Order Approach
The company’s build-to-order model enables its buyers to select their specific home site, structural options and design studio finishes that match their lifestyles and tastes. As the buyers customize their homes, they become both financially and emotionally invested. Additionally, with approximately 26% of buyers paying all cash and the average loan-to-value for those who obtained a mortgage at 69%, affordability is less of an issue for TOL buyers, who tend to be wealthier with more disposable income. As a result, its backlog cancelation rate in the final quarter of fiscal 2023 has been the lowest in the industry for decades in volatile markets.
At the end of the fiscal fourth quarter, Toll Brothers’ backlog was 6,578 homes valued at $6.95 billion. Considering the range of 9,850-10,350 homes projected to be delivered, which increased from 9,597 units in fiscal 2023, the company believes fiscal 2024 to be another solid high-margin year. The company’s backlog is supported by substantial non-refundable down payments.
Focus on Affordability
During the fourth quarter of fiscal 2023, the company's affordable luxury and active adult communities stood out as the strongest performers. The affordable luxury homes and active adult unit sales witnessed year-over-year growth of 109% and 82%, respectively. The affordable luxury homes constituted approximately 46% of the company's fourth-quarter fiscal 2023 unit sales, while luxury homes accounted for 31% and active adults comprised 23%.
Boosting Presence
Based on the land TOL owns or controls, management is targeting community count growth of 10% for fiscal 2024. This reflects accelerating land acquisition and development to meet the resurgence in homebuyer demand. TOL’s extensive geographic footprint and deep land position will allow it to grow its community count in fiscal 2024 and beyond, which is attributable to the faster-than-expected sales of the existing communities.
In fiscal 2023, the company spent about $1,241.9 million on land to purchase approximately 9,352 lots. At the fiscal 2023-end, the company owned and controlled 70,700 lots. In fiscal 2023, it invested $2.3 billion in land acquisition and development.
Enough Liquidity
At the fiscal 2023-end, Toll Brothers had $3 billion of total liquidity, comprising $1.3 billion in cash and cash equivalents and approximately $1.79 billion availability under the revolver capacity. The revolving bank credit facility will not mature until February 2028. Also, total debt at the fiscal 2023-end was $2.86 billion, down from $3.33 billion at the fiscal 2022-end. Debt to capital was 29.6% at the fiscal 2023-end, down from 35.7% at the fiscal 2022-end.
In fiscal 2024, the company anticipates repurchasing $400 million worth of common stock, showcasing its strong financial standing and dedication to rewarding shareholders. Additionally, on Mar 9, 2023, Toll Brothers' board of directors authorized a 5% increase in its quarterly cash dividend to shareholders, raising it to 21 cents per share (equivalent to 84 cents annually). This marks the third consecutive year of dividend hikes by the company.
Hurdles to Cross
The housing sector experiences cyclical patterns influenced by factors such as consumer confidence, prevailing economic conditions, and interest rates. Actions taken by the federal government, including economic stimulus measures, taxation policies, and borrowing limits, have the potential to impact consumer confidence and spending levels, thereby affecting both the economy and the housing market.
Additionally, rising building materials and labor costs are growing concerns for the company’s margin. Labor shortages are leading to higher wages due to limited availability.
EME delivered a trailing four-quarter earnings surprise of 25%, on average. The Zacks Consensus Estimate for EME’s 2023 sales and earnings per share (EPS) indicates growth of 12% and 52.8%, respectively, from the previous year’s reported levels.
Acuity Brands, Inc. (AYI - Free Report) currently carries a Zacks Rank of 2 (Buy). AYI delivered a trailing four-quarter earnings surprise of 12%, on average.
The stock has gained 17.5% in the past six months. The Zacks Consensus Estimate for AYI’s fiscal 2024 sales and EPS indicates a decline of 3% and 4.7%, respectively, from a year ago.
Armstrong World Industries (AWI - Free Report) currently carries a Zacks Rank #2. AWI delivered a trailing four-quarter earnings surprise of 7.9%, on average.
Shares of the company have gained 36% in the past six months. The Zacks Consensus Estimate for AWI’s 2023 sales and EPS indicates growth of 4.7% and 8.2%, respectively, from the previous year’s reported levels.
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Toll Brothers (TOL) Surges 83.6% in a Year: More Room to Run?
As existing homes for sale remain scarce and mortgage rates improve, the housing forecast looks increasingly optimistic as we approach the New Year.
Given these tailwinds, among the industry bellwethers, Toll Brothers Inc. (TOL - Free Report) has been riding high, given the strategy of broadening product lines, price points and geographies. Prudent inorganic drive and the lack of competition in the luxury new home market also act as major tailwinds for this Horsham, PA-based homebuilder.
Shares of this Zacks Rank #3 (Hold) company have gained 83.6% in the past year, outperforming the Zacks Building Products - Home Builders industry’s 65.9% rally. The stock has fared better than the Zacks Construction sector and the S&P 500 Index’s 32.8% and 15.1% rallies, respectively.
Image Source: Zacks Investment Research
The solid price performance was backed by the above-mentioned factors and an impressive earnings surprise history. Its earnings surpassed the Zacks Consensus Estimate in the trailing 14 quarters.
Earnings estimates for fiscal 2024 have moved north to $12.23 per share from $12.08 over the past seven days, depicting analysts’ optimism over the company’s prospects. This bullish trend justifies the stock’s addition to investors’ portfolios.
Let’s delve into the driving factors.
Build-to-Order Approach
The company’s build-to-order model enables its buyers to select their specific home site, structural options and design studio finishes that match their lifestyles and tastes. As the buyers customize their homes, they become both financially and emotionally invested. Additionally, with approximately 26% of buyers paying all cash and the average loan-to-value for those who obtained a mortgage at 69%, affordability is less of an issue for TOL buyers, who tend to be wealthier with more disposable income. As a result, its backlog cancelation rate in the final quarter of fiscal 2023 has been the lowest in the industry for decades in volatile markets.
At the end of the fiscal fourth quarter, Toll Brothers’ backlog was 6,578 homes valued at $6.95 billion. Considering the range of 9,850-10,350 homes projected to be delivered, which increased from 9,597 units in fiscal 2023, the company believes fiscal 2024 to be another solid high-margin year. The company’s backlog is supported by substantial non-refundable down payments.
Focus on Affordability
During the fourth quarter of fiscal 2023, the company's affordable luxury and active adult communities stood out as the strongest performers. The affordable luxury homes and active adult unit sales witnessed year-over-year growth of 109% and 82%, respectively. The affordable luxury homes constituted approximately 46% of the company's fourth-quarter fiscal 2023 unit sales, while luxury homes accounted for 31% and active adults comprised 23%.
Boosting Presence
Based on the land TOL owns or controls, management is targeting community count growth of 10% for fiscal 2024. This reflects accelerating land acquisition and development to meet the resurgence in homebuyer demand. TOL’s extensive geographic footprint and deep land position will allow it to grow its community count in fiscal 2024 and beyond, which is attributable to the faster-than-expected sales of the existing communities.
In fiscal 2023, the company spent about $1,241.9 million on land to purchase approximately 9,352 lots. At the fiscal 2023-end, the company owned and controlled 70,700 lots. In fiscal 2023, it invested $2.3 billion in land acquisition and development.
Enough Liquidity
At the fiscal 2023-end, Toll Brothers had $3 billion of total liquidity, comprising $1.3 billion in cash and cash equivalents and approximately $1.79 billion availability under the revolver capacity. The revolving bank credit facility will not mature until February 2028. Also, total debt at the fiscal 2023-end was $2.86 billion, down from $3.33 billion at the fiscal 2022-end. Debt to capital was 29.6% at the fiscal 2023-end, down from 35.7% at the fiscal 2022-end.
In fiscal 2024, the company anticipates repurchasing $400 million worth of common stock, showcasing its strong financial standing and dedication to rewarding shareholders. Additionally, on Mar 9, 2023, Toll Brothers' board of directors authorized a 5% increase in its quarterly cash dividend to shareholders, raising it to 21 cents per share (equivalent to 84 cents annually). This marks the third consecutive year of dividend hikes by the company.
Hurdles to Cross
The housing sector experiences cyclical patterns influenced by factors such as consumer confidence, prevailing economic conditions, and interest rates. Actions taken by the federal government, including economic stimulus measures, taxation policies, and borrowing limits, have the potential to impact consumer confidence and spending levels, thereby affecting both the economy and the housing market.
Additionally, rising building materials and labor costs are growing concerns for the company’s margin. Labor shortages are leading to higher wages due to limited availability.
Better-Ranked Stocks From the Construction Sector
EMCOR Group, Inc. (EME - Free Report) currently sports a Zacks Rank of 1 (Strong Buy). Shares of the company have risen 23.8% in the past six months. You can see the complete list of today’s Zacks #1 Rank stocks here.
EME delivered a trailing four-quarter earnings surprise of 25%, on average. The Zacks Consensus Estimate for EME’s 2023 sales and earnings per share (EPS) indicates growth of 12% and 52.8%, respectively, from the previous year’s reported levels.
Acuity Brands, Inc. (AYI - Free Report) currently carries a Zacks Rank of 2 (Buy). AYI delivered a trailing four-quarter earnings surprise of 12%, on average.
The stock has gained 17.5% in the past six months. The Zacks Consensus Estimate for AYI’s fiscal 2024 sales and EPS indicates a decline of 3% and 4.7%, respectively, from a year ago.
Armstrong World Industries (AWI - Free Report) currently carries a Zacks Rank #2. AWI delivered a trailing four-quarter earnings surprise of 7.9%, on average.
Shares of the company have gained 36% in the past six months. The Zacks Consensus Estimate for AWI’s 2023 sales and EPS indicates growth of 4.7% and 8.2%, respectively, from the previous year’s reported levels.