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Toll Brothers (TOL) up 18.3% in 3 Months: Factors Behind the Rally

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Although supply chain bottlenecks, a rise in mortgage rates and affordability issues have been taking a toll on the U.S. housing market these days, impressive existing home sales data is a major tailwind. According to the National Association of Realtors, sales of previously owned homes leaped 14.5% in February compared with January.

Also, the 30-year fixed-rate mortgage averaged 6.42% in the week ending Mar 23, down from 6.60% the week before, according to data from Freddie Mac released. This drop marks the second week in a row amid lingering concerns about uncertainty in the financial markets. The first few weeks of the spring homebuying season would be glowing for the homebuilding market if mortgage rates continue to drop.

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.

Zacks Investment Research
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Shares of this Zacks Rank #2 (Buy) company have gained 18.3% over the past three months, in line with the Zacks Building Products - Home Builders industry’s rally. The stock has fared better than the Zacks Construction sector and S&P 500 Index’s 7% and 5.6% rallies, respectively. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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 12 quarters.

Earnings estimates for fiscal 2023 have moved north to $8.66 per share from $8.14 over the past 30 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.

Boosting Presence

Based on the land TOL owns or controls, management is targeting community count growth of 10% for fiscal 2023, which 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 2023 and beyond, attributable to faster-than-expected sales of the existing communities.

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.

In the first quarter of fiscal 2023, TOL spent $262 million on land to purchase approximately 1,700 lots.  In the fiscal year 2022, TOL invested $2.2 billion in land acquisition and development.

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 they customize their homes, they become both financially and emotionally invested. Additionally, with approximately 20% of buyers paying all cash and the average loan-to-value or LTV for those who obtained a mortgage at 71%, affordability is less of an issue for TOL buyers, who tend to be wealthier with more disposable income.

At the end of the fiscal first quarter, TOL’s backlog was 7,733 homes valued at $8.6 billion. Considering a midpoint of 8,500 homes projected to be delivered, the company believes fiscal 2023 to be another solid high-margin year. The company’s backlog is supported by substantial non-refundable down payments.

Based on the strength of backlog and including estimates for increased cancelations and incentivizing, TOL expects a fiscal 2023 adjusted gross margin of 27%.  It anticipates earnings between $8.00 and $9.00 per share next year, which would be TOL’s second-best year ever and book value per share will increase more than $60 at fiscal 2023-end.

Enough Liquidity

At the fiscal first-quarter end, Toll Brothers had more than $2.6 billion of total liquidity, comprising $791.6 million in cash and cash equivalents and $1.8 billion availability under the revolver capacity.

The revolving bank credit facility will not mature until February 2028. Also, total debt at the fiscal first-quarter end was $3.21 billion, down from $3.33 billion at fiscal 2022-end. Debt to capital was 34.1% at the fiscal first-quarter end, down from 37.5% at fiscal 2022-end.

Driving Shareholder Value

The company has been consistently driving shareholder value by returning cash to shareholders through regular share repurchases and dividend payments. In the first quarter of fiscal 2023, TOL returned $32 million to shareholders through share repurchases and dividends. The company continues to expect to repurchase $100 million of common stock per quarter in fiscal 2023.

Meanwhile, on Mar 9, 2023, it announced a 5% hike in its quarterly dividend to 21 cents per share (or 84 cents annually) from 20 cents (or 80 cents annually). This move highlights the company’s stable financial position and commitment to rewarding shareholders. This marks the third consecutive year Toll Brothers has raised its dividend.

Other Top-Ranked Stocks From the Construction Sector

Taylor Morrison (TMHC - Free Report) : This Scottsdale, AZ-based homebuilder’s ongoing operational enhancements, acquisition synergies and robust pricing power have more than offset the inflationary pressure and delays in some closings. The company’s well-balanced, diverse mix of portfolio and operating strategy is encouraging. Shares of the company have gained 19.3% in the past three months.

TMHC currently sports a Zacks Rank #1. The Zacks Consensus Estimate for its 2023 earnings has been upwardly revised to $6.46 per share from $4.92 per share over the past 60 days.

NVR Inc. (NVR - Free Report) : A disciplined business model and focus on maximizing liquidity and minimizing risks have helped NVR. The lot acquisition strategy helps the company avoid financial requirements and risks associated with direct land ownership and land development. This strategy allows it to gain efficiencies and a competitive edge over its peers.

NVR currently sports a Zacks Rank #1. NVR has seen an upward estimate revision for 2023 earnings over the past 30 days to $394.77 per share from $321.83. Shares of the company have gained 16.3% in the past three months.

Sterling Infrastructure, Inc. (STRL - Free Report) currently carries a Zacks Rank #2. STRL has a trailing four-quarter earnings surprise of 19.3%, on average. Shares of the company have gained 15.7% in the past three months.

The Zacks Consensus Estimate for STRL’s 2023 sales indicates a 0.8% decline, while that for EPS suggests 10.8% growth.

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