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Here's Why Investors Should Buy Toll Brothers (TOL) Stock Now
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The U.S. housing market has been dealing with challenges associated with rising mortgage rates, supply-chain disruptions, material cost inflation and higher wages. Nonetheless, homebuilders like Toll Brothers Inc. (TOL - Free Report) are navigating these headwinds well with a build-to-order approach and solid backlog level. Also, the lack of competition in the luxury housing market is a competitive advantage adding to the company’s growth.
Shares of this Horsham, PA-based luxury homebuilder have gained 31.4% over the past six months compared with the Zacks Building Products - Home Builders industry’s 36.8% rise. This Zacks Rank #2 (Buy) stock has a long-term earnings growth rate of 11%, which highlights its inherent strength.
The Zacks Consensus Estimate has witnessed an uptrend over the past 30 days as analysts raised their estimates. Over the said time frame, the Zacks Consensus Estimate of $8.66 and $7.86 for fiscal 2023 and 2024 has increased 2.1% and 2.3%, respectively.
Image Source: Zacks Investment Research
What Makes the Stock an Attractive Pick?
Slightly Improving Builders’ Sentiment: Builders are now cautiously optimistic for 2023 as a lack of existing inventory is shifting demand to the new home market. Although builders continue to grapple with high construction costs and material supply chain disruptions, they continue to witness strong pent-up demand as buyers wait for interest rates to drop and turn more to the new home market due to a shortage of existing inventory.
Although builder confidence in the market for newly-built single-family homes in March remains below 50, it rose two points to 44, according to the National Association of Home Builders /Wells Fargo Housing Market Index released recently. This is the third straight monthly increase in builder sentiment levels.
On the first quarter of fiscal 2023 earnings call, Toll Brothers highlighted that the company had seen a marked increase in demand beyond normal seasonality as buyer confidence appears to be improving.
TOL believes that the recent pick-up in demand is a sign that the long-term fundamentals underpinning the housing market remain intact. These include favorable demographic and migration trends, a very tight resale market and growing pent-up demand resulting from over a decade of underproduction.
Build-To-Order Approach: At the end of the fiscal first quarter, TOL’s backlog was 7,733 homes valued at $8.6 billion, and with 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.
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 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. Based on the strength of backlog and including estimates for increased cancelations and incentivizing, TOL expects a fiscal 2023 adjusted gross margin of 27%.
Broad Footprint: Toll Brothers has secured some of the most sought-after urban locations in the country, where land is scarce and approvals are not easy to obtain. Toll Brothers is using its strong liquidity position to secure the most sought-after urban locations in the country, like New York City Market, Northern New Jersey, Washington D.C. and Philadelphia. The company’s solid land position places it well to meet 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 fiscal year 2022, TOL invested $2.2 billion in land acquisition and development. Based on the land TOL owns or controls, it expects to grow the community count by 10% by the end of fiscal 2023.
Other Key Picks
Some other top-ranked stocks in the same space are:
Taylor Morrison Home Corporation’s (TMHC - Free Report) ongoing operational enhancements, acquisition synergies and robust pricing power have more than offset the inflationary pressure and delays in some closings.
TMHC currently sports a Zacks Rank #1 (Strong Buy). The Zacks Consensus Estimate for its 2023 earnings has been upwardly revised to $6.46 per share from $5.47 over the past 30 days. Shares of the company have gained 44.6% in the past six months.
Based in Los Angeles, CA, KB Home (KBH - Free Report) has been gaining from prudent growth plans, a solid existing geographic footprint and a built-to-order approach.
KBH currently carries a Zacks Rank #2. The Zacks Consensus Estimate of $4.97 and $5.21 for 2023 and 2024 has increased 20.6% and 19.2%, respectively, over the past 30 days. Shares of the company have gained 43.7% in the past six months.
Image: Bigstock
Here's Why Investors Should Buy Toll Brothers (TOL) Stock Now
The U.S. housing market has been dealing with challenges associated with rising mortgage rates, supply-chain disruptions, material cost inflation and higher wages. Nonetheless, homebuilders like Toll Brothers Inc. (TOL - Free Report) are navigating these headwinds well with a build-to-order approach and solid backlog level. Also, the lack of competition in the luxury housing market is a competitive advantage adding to the company’s growth.
Shares of this Horsham, PA-based luxury homebuilder have gained 31.4% over the past six months compared with the Zacks Building Products - Home Builders industry’s 36.8% rise. This Zacks Rank #2 (Buy) stock has a long-term earnings growth rate of 11%, which highlights its inherent strength.
The Zacks Consensus Estimate has witnessed an uptrend over the past 30 days as analysts raised their estimates. Over the said time frame, the Zacks Consensus Estimate of $8.66 and $7.86 for fiscal 2023 and 2024 has increased 2.1% and 2.3%, respectively.
Image Source: Zacks Investment Research
What Makes the Stock an Attractive Pick?
Slightly Improving Builders’ Sentiment: Builders are now cautiously optimistic for 2023 as a lack of existing inventory is shifting demand to the new home market. Although builders continue to grapple with high construction costs and material supply chain disruptions, they continue to witness strong pent-up demand as buyers wait for interest rates to drop and turn more to the new home market due to a shortage of existing inventory.
Although builder confidence in the market for newly-built single-family homes in March remains below 50, it rose two points to 44, according to the National Association of Home Builders /Wells Fargo Housing Market Index released recently. This is the third straight monthly increase in builder sentiment levels.
On the first quarter of fiscal 2023 earnings call, Toll Brothers highlighted that the company had seen a marked increase in demand beyond normal seasonality as buyer confidence appears to be improving.
TOL believes that the recent pick-up in demand is a sign that the long-term fundamentals underpinning the housing market remain intact. These include favorable demographic and migration trends, a very tight resale market and growing pent-up demand resulting from over a decade of underproduction.
Build-To-Order Approach: At the end of the fiscal first quarter, TOL’s backlog was 7,733 homes valued at $8.6 billion, and with 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.
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 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. Based on the strength of backlog and including estimates for increased cancelations and incentivizing, TOL expects a fiscal 2023 adjusted gross margin of 27%.
Broad Footprint: Toll Brothers has secured some of the most sought-after urban locations in the country, where land is scarce and approvals are not easy to obtain. Toll Brothers is using its strong liquidity position to secure the most sought-after urban locations in the country, like New York City Market, Northern New Jersey, Washington D.C. and Philadelphia. The company’s solid land position places it well to meet 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 fiscal year 2022, TOL invested $2.2 billion in land acquisition and development. Based on the land TOL owns or controls, it expects to grow the community count by 10% by the end of fiscal 2023.
Other Key Picks
Some other top-ranked stocks in the same space are:
Taylor Morrison Home Corporation’s (TMHC - Free Report) ongoing operational enhancements, acquisition synergies and robust pricing power have more than offset the inflationary pressure and delays in some closings.
TMHC currently sports a Zacks Rank #1 (Strong Buy). The Zacks Consensus Estimate for its 2023 earnings has been upwardly revised to $6.46 per share from $5.47 over the past 30 days. Shares of the company have gained 44.6% in the past six months.
Based in Los Angeles, CA, KB Home (KBH - Free Report) has been gaining from prudent growth plans, a solid existing geographic footprint and a built-to-order approach.
KBH currently carries a Zacks Rank #2. The Zacks Consensus Estimate of $4.97 and $5.21 for 2023 and 2024 has increased 20.6% and 19.2%, respectively, over the past 30 days. Shares of the company have gained 43.7% in the past six months.
You can see the complete list of today’s Zacks #1 Rank stocks here.
Beazer Homes USA (BZH - Free Report) designs, builds and sells single-family homes. Shares of the company have gained 49% in the past six months.
BZH currently carries a Zacks Rank #2. Earnings estimates for fiscal 2023 have increased to $3.56 per share from $3.46 over the past 60 days.