Toll Brothers (TOL Quick QuoteTOL - Free Report) has seen its stock price fall 8.9% since reporting its first-quarter fiscal 2025 earnings (ended Jan. 31). The decline reflects concerns over mortgage rate volatility, affordability issues, and pressure on profit margins.

These factors have made investors cautious, especially as the company’s stock performance has lagged behind peers like D.R. Horton, Inc. (DHI Quick QuoteDHI - Free Report) , Lennar Corporation (LEN Quick QuoteLEN - Free Report) and NVR, Inc. (NVR Quick QuoteNVR - Free Report) , which all reported gains of 3.7%, 3% and 3.2%, respectively, in the same period.

In comparison, the Zacks Building Products - Home Builders industry and the broader Construction sector have outperformed Toll Brothers, reflecting a stronger overall demand environment that has not translated equally for all builders. The stock is also trading close to its 52-week low of $105.73, reached on March 4.

TOL’s Share Performance

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Adding to investor concerns, TOL is trading below its 50-day and 200-day moving averages. Falling below these moving averages is often seen as a bearish technical signal, indicating potential further downside and weaker momentum compared to past performance trends.

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A Look at Toll Brother’s Q1 Performance

Toll Brothers reported a somewhat disappointing first-quarter fiscal 2025, with revenues of $1.86 billion, marking a 4.6% year-over-year decline. Earnings per share (EPS) was $1.75, missing analyst expectations by 12.1%. The primary reasons for this shortfall were impairments and the delay of a joint venture apartment property sale. However, despite the earnings miss, the company’s core homebuilding operations performed as expected (read more: Toll Brothers Stock Down on Q1 Earnings & Revenues Miss).

TOL’s EPS Estimates Trend

Analysts have also trimmed earnings expectations for fiscal 2025, with earnings per share (EPS) estimates declining from $14.15 to $13.80 in the past month, as shown below. While this doesn’t indicate an immediate turnaround, it does highlight limited upside potential in the near term.

The estimated figure indicates an 8.1% decline from fiscal 2024.

Stay up-to-date with the quarterly releases: See Zacks Earnings Calendar.

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Challenges Weighing on Toll Brothers Stock

Affordability Issues Impacting Luxury Home Sales: Toll Brothers caters to high-end homebuyers, but even affluent customers are feeling the pinch of high home prices and mortgage rates. Buyers in the lower segment of the luxury market are hesitating, waiting for rates to ease before making a purchase. This caution has led to uneven demand across different regions, with Florida and Austin, Texas, experiencing notable slowdowns.

The broader macroeconomic environment played a role in the company’s performance. While Toll Brothers’ buyers are generally financially strong, the uncertainty around interest rates created hesitation among some potential customers.

Regional Demand Disparities: While the Northeast and Mid-Atlantic regions have shown strong demand due to limited housing supply, markets like Jacksonville, Tampa, Phoenix, and Portland have struggled. An influx of new homes from competitors has increased buyer options, forcing Toll Brothers to adjust its pricing and incentives to stay competitive.

Rising Inventory and Strategic Adjustments: Toll Brothers’ spec home inventory now accounts for 55% of total sales. While having available homes can help meet demand, it also presents risks in weaker markets. The company has responded by slowing down new builds in underperforming areas to avoid excessive supply.

Delayed Joint Venture Sales Hurt Earnings Performance: A key contributor to the earnings miss in the fiscal first quarter was the delay of a joint venture apartment property sale. While this was not directly related to the company’s core homebuilding business, it still impacted overall financial results. The sale had been expected to close within the quarter but was pushed into the second half of fiscal 2025. This delay led to lower-than-anticipated joint venture income, contributing to the shortfall in EPS.

Despite this setback, Toll Brothers expressed confidence that the sale would be completed later in the year. However, the delay underscored the unpredictability of certain real estate transactions, particularly in a market where financing and buyer sentiment remain volatile.

Higher Selling and Marketing Expenses Added Cost Pressures: Another challenge in the fiscal first quarter was an increase in selling and marketing expenses, which contributed to a higher-than-expected SG&A ratio. Toll Brothers initially guided SG&A expenses to be 12.7% of home sales revenue but ended up reporting 13.1%. This was partly due to lower-than-expected homebuilding revenue, which resulted in a loss of fixed-cost leverage.

While the company expects SG&A as a percentage of revenue to decline over the remainder of fiscal 2025 due to higher anticipated revenue, the increase in marketing costs reflects the need to remain competitive in a market where buyer hesitancy is growing. In some markets, Toll Brothers has had to adjust incentives or deploy additional marketing efforts to drive sales, particularly in communities facing heightened competition.

Decoding Toll Brothers’ Tailwinds

Strong Demand Among Wealthy Buyers: Despite challenges, Toll Brothers continues to attract high-net-worth buyers. In the fiscal first quarter, 26% of its customers paid all cash, and the average loan-to-value ratio among those financing was just 68%. This indicates strong financial standing among its buyers, providing some cushion against economic uncertainties.

Operational Strength and Financial Flexibility: Toll Brothers has improved its construction timelines, enabling it to navigate supply chain challenges better than some competitors. The company also maintains $2.3 billion in liquidity and has a disciplined approach to land acquisitions, with 56% of lots currently under option rather than outright ownership. Additionally, the company’s ongoing $500 million stock repurchase program signals confidence in its long-term prospects.

Spec Home Strategy Provided Inventory Flexibility: Toll Brothers continued to refine its approach to speculative (spec) home construction, ensuring that it had the right mix of ready-to-move-in homes to meet buyer demand while avoiding excess inventory. Spec homes accounted for 55% of total sales and 52% of deliveries in the first quarter of fiscal 2025, a level the company considered manageable.

Unlike some competitors, who aggressively built speculative homes across all price points, Toll Brothers took a strategic approach, focusing on spec home construction in markets where demand remained strong. The company actively adjusted its spec starts based on local conditions, slowing new builds in weaker areas while increasing activity where sales momentum justified it. This approach provided the flexibility to respond to changing market conditions without overextending its inventory.

Toll Brothers’ Valuation: A Discount or a Warning Sign?

Toll Brothers’ stock appears undervalued relative to its industry, trading at a forward 12-month price-to-earnings (P/E) ratio of 7.81, compared to the industry average of 9.2. Historically, its P/E has remained between 3.80 and 11.46, with a median of 7.52.

Adding to its appeal, Toll Brothers carries a Value Score of A, highlighting its strong fundamentals and attractive valuation relative to peers.

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What Should Investors Do With TOL Stock Now?

Despite recent challenges, Toll Brothers remains a fundamentally strong company with solid long-term prospects. The stock’s decline and near-term headwinds, such as affordability concerns and regional demand disparities, have weighed on investor sentiment. However, Toll Brothers continues to attract high-net-worth buyers, maintain stable pricing, and manage inventory strategically to navigate market fluctuations.

Its strong Value Score of A suggests that the stock is trading at an attractive valuation, and its disciplined financial strategy, including a $500 million stock repurchase plan, reinforces management’s confidence in the company’s future. Additionally, Toll Brothers currently holds a Zacks Rank #3 (Hold), indicating a balanced risk-reward profile. Investors with a long-term outlook may want to hold onto the stock, as a potential rebound could emerge once mortgage rates stabilize and demand strengthens. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.