There’s no denying that the U.S. housing data has been weak in the last two months as inventory shortage has started taking its toll on sales’ pace and has pushed average home prices higher nationwide.
Nonetheless, overlooking the sector will not be prudent as there are a number of companies with decent performance history and strong fundamentals, signaling at a profitable investment opportunity. After all, the overall outlook for the U.S housing industry remains positive with healthy economy, strong job market and historically low mortgage rates that will continue to drive stocks higher.
Toll Brothers Inc. (TOL - Free Report) is one such company that continues to show strength in several areas. Adding the stock to your portfolio should not be a disappointment. The company mostly caters to luxury move up buyers, who already possess a residence but are looking to shift to larger and better homes. These homebuyers are less sensitive to price changes. Toll Brothers enjoys greater pricing power than other homebuilding companies.
Shares of Toll Brothers have gained 48% in the last one year compared with the industry’s growth of 41.5%. Earnings estimates for Toll Brothers have exhibited an uptrend, reflecting optimism in the stock’s prospects. The Zacks Consensus Estimate for the company’s current-year earnings has moved up 1.9% over the last 60 days. Also, estimates for fiscal 2018 have climbed 3.4% over the same time frame. Let us delve deeper into the other factors which make this Zacks Rank #2 (Buy) stock a lucrative pick.
What Makes the Stock an Attractive Pick?
Solid Growth Prospects
Presently, the problem of adequate supply of land is taking its worst shape in the homebuilding industry, as demand continues to scale up. Given significant pent up housing demand, 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 urban locations in the country such as New York City Market, Northern New Jersey, Washington D.C. and Philadelphia.
At the end of the fiscal third quarter, Toll Brothers had a backlog of 6,282 homes, up 21% year over year. Potential housing revenues from backlog grew 21% year over year to $5.31 billion.
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.
Toll Brothers has solid growth prospects as evident from the Zacks Consensus Estimate for earnings of $3.20 per share for the current year, which is expected to grow 46% year over year (significantly higher than the industry’s average of 18.3%).
Meanwhile, the company’s sales are expected to increase 13.5% in the current year compared with the industry’s average growth of just 8%.
Valuation Looks Rational
We find the price-to-book ratio as the best multiple for valuing homebuilders because of their asset-driven nature. M/I Homes currently has a trailing 12-month P/B ratio of 1.6 comparing favorably with the industry’s P/B ratio of 1.8. Hence, its lower-than-market positioning hints at more upside in the quarters ahead.
Return on Equity
Toll Brothers’ trailing 12-month return on equity (ROE) supports growth potential. ROE in the trailing 12 months is 10.4%, same as the industry average. This reflects the company’s efficient usage of shareholders’ funds.
Other Stocks to Consider
A few other top-ranked stocks worth considering in the same space are Beazer Homes USA, Inc. (BZH - Free Report) , Persimmon Plc and KB Home (KBH - Free Report) .
Beazer Homes sports a Zacks Rank #1 (Strong Buy) and is likely to witness a rise of 60.6% in earnings for the current quarter.
Persimmon, also a Zacks Rank #1 stock, is expected to witness 18.3% growth in earnings this year. You can see the complete list of today’s Zacks #1 Rank stocks here.
KB Home, a Zacks Rank #2 stock, is expected to witness 54.9% growth in fiscal 2017 earnings.
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