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Toll Brothers: Housing Market Strong, Supply Woes Remain

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On Nov 24, we issued an updated research report on Toll Brothers Inc. (TOL - Free Report) – builder of single-family detached and attached home communities, luxury residential and urban communities, principally on the land it develops.

Toll Brothers mostly offers luxury homes and its communities are located in prosperous suburban areas with easy access to major cities. Luxury homes generally face limited competition. These homebuyers are less sensitive to price changes. Toll Brothers enjoys greater pricing power than other homebuilding companies.  

Housing Market Strong

Last year has been quite favorable for the housing market, possibly the best since the housing recession in 2007. Despite the weak start to 2016, thanks to equity market volatility and global concerns, the construction sector seems to have recovered on the back of strong housing fundamentals. Positives like an improving economy, modest wage growth, low unemployment levels and interest rates, positive consumer confidence, and a tight supply situation raise optimism about the sector’s performance in the near term.

Improving labor markets, falling unemployment rates, low mortgage rates and a limited home supply continue to support a rise in home prices, thereby boosting homebuilders’ top line. Moreover, housing has been an affordable option in 2015 as mortgage rates remained close to historic lows. They were down post Brexit as well. So from a mortgage perspective, conditions are favorable to buy a home.

Even if mortgage rates rise with the possibilities of the Fed announcing a federal fund rate hike, rates should remain reasonable, in our view, keeping housing affordable. Modest hikes in interest rates in the context of an improving economic environment can have positive impact on the housing sector.

Supply Constraints

Several years of production deficits during the housing downturn limited the supply of both rental and new homes in the country. At present, a shortage of buildable lots, skilled labor and available capital for smaller builders are limiting home production, thereby lowering the inventory of homes, both new and existing.

Again, Rising building materials and labor costs are growing concerns for the company’s margin. While labor shortages are increasing wages, land prices are inflating due to limited availability. This could eat into homebuilders’ margins in the forthcoming quarters.

Toll Brothers is set to report fourth quarter and fiscal 2016 results on Dec 6, 2016. For the fiscal 2016, the Zacks Consensus Estimate for earnings is pegged at $2.49, reflecting a 21.9% year-over-year increase.

Toll Brothers carries a Zacks Rank #2 (Buy).

Other Stocks to Consider

Other favorably ranked stocks in the construction industry include Gibraltar Industries, Inc. (ROCK - Free Report) , Hovnanian Enterprises Inc. and AAON, Inc. (AAON - Free Report) .

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

Full-year 2016 earnings for Gibraltar are expected to grow 44.9%.

Hovnanian, a Zacks Rank #2 stock, is likely to witness 190.9% growth in fiscal 2016 earnings.

AAON carries a Zacks Rank #2. Full-year 2016 earnings for the company are expected to rise 21.4%.

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