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Toll Brothers (TOL) Surges 37.3% YTD: Will the Momentum Continue?

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The lack of existing homes for sale and more stabilized mortgage rates have been boosting the confidence of the homebuilders. Also, lumber prices have been declining since March 2023, which is helping the companies to drive margins to some extent.

These tailwinds have been driving industry bellwethers like Toll Brothers Inc. (TOL - Free Report) . The company is also benefiting from its strategy of broadening product lines, price points and geographies. Prudent inorganic drive and the lack of competition in the luxury new home market act as major tailwinds for this Horsham, PA-based homebuilder.

Shares of this Zacks Rank #1 (Strong Buy) company have gained 37.3% year to date, outperforming the Zacks Building Products - Home Builders industry’s 26.5% rally. The stock has fared better than the Zacks Construction sector and the S&P 500 Index’s 12.8% and 10.7% rallies, respectively.

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 13 quarters.

Earnings estimates for fiscal 2023 have moved north to $9.45 per share from $8.66 over the past 30 days, depicting analysts’ optimism over the company’s prospects. This bullish trend justifies the stock’s addition to investors’ portfolios.

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Image Source: Zacks Investment Research

Let’s delve into the driving factors.

Efforts to Boost 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 half of fiscal 2023, TOL spent $489 million on land to purchase approximately 1,700 lots each in the two quarters of the current fiscal year. In fiscal 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 the buyers 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 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 second quarter, TOL’s backlog was 7,574 homes valued at $8.4 billion. Considering a midpoint of 9,200 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 fiscal 2023 adjusted gross margin of 27.8%. This is higher than 27.5% reported in fiscal 2022. It anticipates earnings between $10.00 and $11.00 per share in fiscal 2023, which would be TOL’s second-best year ever and book value per share will increase more than $60 at the fiscal 2023-end.

Enough Liquidity

At the fiscal second-quarter end, Toll Brothers had more than $2.6 billion of total liquidity, comprising $761.9 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 second-quarter end was $2.83 billion, down from $3.33 billion at the fiscal 2022-end. Debt to capital was 30.6% at the fiscal second-quarter end, down from 35.7% at the fiscal 2022-end.

Higher 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 half of fiscal 2023, TOL returned $46 million to shareholders through dividends. In the first quarter of fiscal 2023, TOL repurchased 187,300 shares at an average price for a total purchase price of $9.4 million. In the second quarter, the company spent $84 million to buy back 1.4 million shares. The company continues to expect to repurchase $100 million of common stock per quarter in fiscal 2023.

Meanwhile, on Mar 9, 2023, the company 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 of dividend increase.

Other Top-Ranked Stocks From the Construction Sector

Meritage Homes Corporation's (MTH - Free Report) strategic shift to a pure-play entry-level and first-move-up builder is expected to yield higher absorptions, aided by an improving community count growth trajectory.

Meritage Homes currently sports a Zacks Rank #1. Its shares have gained 28.4% this year so far. MTH has seen an upward estimate revision for 2023 and 2024 earnings by 19.6% and 18% over the past 30 days, respectively. Again, it carries an impressive VGM Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.

PulteGroup Inc. (PHM - Free Report) has been reaping benefits from the successful execution of strategic initiatives to boost profitability, with a focus on entry-level homes.

PulteGroup, presently sporting a Zacks Rank #1, has jumped 46.5% year to date. The Zacks Consensus Estimate for its 2023 and 2024 earnings has been upwardly revised by 7.6% and 9.9%, respectively, over the past 30 days. Its earnings topped consensus estimates in three of the trailing four quarters and missed on one occasion, with the average surprise being 15.6%. Again, it carries an impressive VGM Score of A.

NVR Inc.'s (NVR - Free Report) lot acquisition strategy helps the company to 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 sporting a Zacks Rank #1, has gained 21.9% this year. NVR has seen an upward estimate revision for 2023 and 2024 earnings over the past 30 days by 1.4% and 2.1%, respectively. Again, it carries an impressive VGM Score of B.

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