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Bull of the Day: Toll Brothers Inc (TOL)

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Over the past 16 months, we’ve seen an increase in the price of all sorts of commodities – but none of them have stoked the fears of inflation like the steep uptick in the price of lumber.

Though it’s only one of many components that make up the total cost of producing new residential housing units, lumber has an outsized influence on the public perception of the cost of housing. Over the past year, the additional expense of a newly constructed home that’s attributable the cost of lumber raw materials has been estimated at between $12,000 and $36,000.

The St. Louis Fed’s Bureau of Economic Research estimated that the median sales price for a new home in April of 2021 was $372,400, just shy of the all-time high of $373,200 set in January. The increase in the cost of lumber is certainly responsible for a portion of the recent increase in housing values, but it’s far from the whole story.

CMEImage Source: CME

 

The prices of the Random Length Lumber futures contracts at the CME nearly tripled early in 2021, but have since declined more than 50% from those highs. While unexpected demand was largely responsible for the rapid rise, logging companies and sawmill operators were able to rapidly increase production, providing the market with a flood of the raw materials for residential construction.

Low interest rates, shifting demographics and a general trend toward ownership of spaces in which people can both live and work have sent the prices of both new and existing homes to all-time highs. The pace of existing home sales has been sliding over the past several months as high selling prices deter buyers, but those prices remain as firm as ever.

All of those factors are lining up in favor of the nation’s largest home-building companies. Industry analysts estimate that the US is short 2-4 million homes from "full" supply. Thanks to a combination of market pricing power and declining materials costs, earnings estimates are soaring.

The homebuilding stocks typically trade at lower Price to Earnings multiples than the broad markets, but recent upward revisions have made them uncharacteristically cheap. Toll Brothers (TOL - Free Report) Beazer Homes (BZH - Free Report) , Lennar Corp (LEN - Free Report) , Pulte Group (PHM - Free Report) and Century Communities (CCS - Free Report) all enjoy a Zacks Rank #1 (Strong Buy) and all of them currently trade at a forward 12-month P/E Ratio less than 10X.

Zacks Investment ResearchImage Source: Zacks Investment Research

 

Even after a great start to 2021 in terms of share price, these stocks are still a legitimate value opportunity – and you can even earn some income - Toll Brothers, Lennar and Pulte each pay a dividend yield of 1% or more annually. That may not sound all that juicy, but with the 10-year US Treasury Notes yielding less than 1.5%, a 1% dividend in a stock with growth potential is an excellent bonus.

Toll Brothers in particular has seen big increases in earnings estimates extending all the way through 2022 – and earning the company a Zacks Rank #1 (Strong Buy).

Zacks Investment ResearchImage Source: Zacks Investment Research

 

In business – and the business of investing – there are rare occasions when all the stars are aligned for a certain company or industry and all you have to do is recognize the opportunity and make the buy.

Right now, all signs point to a year or more of good times for the homebuilders, and Toll Brothers is the strongest among a strong bunch of candidates.

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