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Investors Must Retain Toll Brothers (TOL) Now: Here's Why

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The Zacks Building Products - Home Builders and related industries have been grappling with supply woes and labor constraints. Also, the rising cost of materials and transportation as well as the Fed’s expectation of future interest rate hikes are adding to the woes. To mitigate the inflationary pressure, Toll Brothers, Inc. (TOL - Free Report) and other notable homebuilders like Lennar Corporation (LEN - Free Report) , PulteGroup, Inc. (PHM - Free Report) and D.R. Horton, Inc. (DHI - Free Report) have undertaken various price actions as well as cost-saving moves. These companies are currently observing price-cost neutrality, which will certainly reduce cost pressure on the bottom line.

Toll Brothers — a notable homebuilder — 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 TOL — a Zacks Rank #3 (Hold) company — have declined 7.3% over a year compared with the industry’s 1.7% fall. Nonetheless, earnings estimates for 2022 have moved up 0.7% over the past 30 days. The 2022 earnings per share of $10.01 indicate 51% year-over-year growth.

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Also, the company currently has a VGM Score of A, supported by a Value Score of A and a Growth Score of B. These positive trends signify analysts’ bullish sentiments, indicates robust fundamentals and the expectation of outperformance in the near term.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Factors Driving Growth

Affordability a Boon: The company continues to look for opportunities to expand its luxury brand to new product lines and price points in a bid to maintain leadership in the luxury segment. At the same time, the company has been strategically adding more affordable luxury communities in view of the current demographic trends and the expanding footprint and customer base. These communities are expected to be more capital efficient.

Expanding Presence: Toll Brothers is using its strong liquidity position to secure the most sought-after urban locations in the country like the 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 its peers who are presently facing land availability constraints.

Management is now targeting community count growth of 375 for fiscal 2022, indicating 10% growth from the fiscal 2021 level, which will reflect 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 2022 and beyond, attributable to faster-than-expected sale of the existing communities.

Solid Liquidity & Boosting Shareholder Value: At fiscal first quarter-end, Toll Brothers had $2.5 billion of total liquidity, comprising $671.4 million in cash and cash equivalents and $1.8 billion availability under the revolver capacity. The revolving bank credit facility will not mature until November 2026.

Recently, the company repaid the remaining $410 million of 5.875% notes that were due February 2022. It has no significant debt maturities until April 2023. Meanwhile, the company’s total debt as of Jan 31, 2022 amounted to $3.24 billion in comparison with $3.56 billion at fiscal fourth quarter 2021-end. Also, its debt to capital for the reported quarter was 38.1% versus 40.2% at fiscal fourth quarter 2021-end and 43.8% in the year-ago period.

This apart, TOL has been consistently driving shareholder value by returning cash to shareholders through regular share repurchases and dividend payments. Recently, TOL announced a hike of 18% in quarterly dividend payout, maintaining its commitment to increase stockholder returns. This move highlights the company’s sound and stable financial position and commitment to reward shareholders.

During the fiscal first quarter, Toll Brothers repurchased nearly 3 million shares of its common stock at an average price of $61.65 per share for approximately $185.8 million.

Supply Chain Disruption & Inflation May Put Pressure on Profits

The rising building material and labor costs are growing concerns for the company’s margin. Labor shortages are resulting in higher wages. Also, higher lumber prices are likely to weigh on the bottom line. Land prices are inflating due to limited availability. This could eat into homebuilders’ margins in the forthcoming quarters.

At present, a shortage of buildable lots, skilled labor and available capital for smaller builders is limiting home production, thereby lowering the inventory of homes, both new and existing. Over the last few quarters, supply headwinds have been compelling homebuilders to increase the prices of homes. For fiscal 2021, Toll Brothers reported a 3.4% increase in the average price of homes delivered. In fact, the average price of homes for net signed contracts rose more than 26% year over year.

The federal government’s actions related to economic stimulus, taxation and borrowing limits could affect consumer confidence, and spending levels may hurt the housing market. It is to be noted that the Federal Reserve expects to raise interest rates three times in 2022 as it exits from the policies enacted at the start of the health crisis. Interest rate hikes, soaring inflation and a smaller bond-buying program are pointing to higher mortgage rates in 2022.

Discussion of Above-Mentioned Stocks

Lennar: This well-known homebuilder is benefiting from effective cost control and focus on making its homebuilding platform more efficient, leading to higher operating leverage.

Lennar’s earnings for fiscal 2022 are expected to rise 10.9% year over year to $15.82 per share. The Zacks Consensus Estimate for fiscal 2022 earnings has improved from $15.60 per share in the past 60 days.

PulteGroup: This Atlanta-based homebuilder has been benefiting from a prudent land investment strategy and focus on entry-level buyers and returning more free cash flow to shareholders. PulteGroup’s annual land acquisition strategies have been resulting in improved volumes, revenues and profitability for quite some time now. The company has been reaping benefits from the successful execution of strategic initiatives to boost profitability, with a focus on entry-level homes.

The Zacks Consensus Estimate for its 2022 earnings has been upwardly revised in the past 30 days to $10.12 per share. Earnings for 2022 are expected to increase 38.6%.

D.R. Horton: This leading homebuilder currently sports a Zacks Rank #1. This Texas-based prime homebuilder continues to gain from industry-leading market share, a solid acquisition strategy, a well-stocked supply of land, lots, and homes along with affordable product offerings across multiple brands.

D.R. Horton’s earnings are expected to rise 38.5% year over year in fiscal 2022.


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PulteGroup, Inc. (PHM) - free report >>

Toll Brothers Inc. (TOL) - free report >>

Lennar Corporation (LEN) - free report >>

D.R. Horton, Inc. (DHI) - free report >>