Full access to Entrepreneur for $5
Subscribe

Why Toll Brothers (TOL) is a Solid Buy for Investors Now

Lack of competition, favorable housing backdrop and acquisitions make Toll Brothers (TOL) a solid pick right now.

By
This story originally appeared on Zacks

Toll Brothers Inc. TOL has been riding high on prudent inorganic drive and sustained improvement of housing backdrop in the United States. Lack of competition in the luxury new home market also acts as a major tailwind for this Horsham, PA-based homebuilder.



Shares of this Zacks Rank #1 (Strong Buy) company have gained 46.7% so far this year compared with the Zacks Building Products - Home Builders industry’s 23% rally. The stock has also fared better than the Zacks Construction sector and S&P 500 Index’s 22.3% and 22% rally, 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 14 of the trailing 15 quarters.



Earnings estimates for 2021 have moved 2.9% north over the past seven days, depicting analysts’ optimism over the company’s prospects. This bullish trend justifies the stock’s addition to investors’ portfolio. You can see the complete list of today’s Zacks #1 Rank stocks here.

- Zacks

Zacks Investment Research

Image Source: Zacks Investment Research

Let’s delve deeper into the major growth drivers.

Inorganic Strategies

Toll Brothers has a penchant for acquisitions and strategic alliances for bolstering inorganic growth as well as expanding market share. The company has secured some of the most sought-after urban locations in the country, where land is scarce and approvals are not easy to obtain. It is making use of strong liquidity position (liquidity was $2.7 billion at fiscal third quarter-end) to secure the most sought-after urban locations in the country like 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 peers who are presently facing land availability constraints.



On Aug 12, it acquired a NV-based privately-held homebuilder, StoryBook Homes, thereby strengthening its foothold in the Las Vegas housing market. The company’s extensive geographic footprint and deep land position on faster-than-anticipated sale of existing communities will allow it to grow community count in fiscal 2021 and 2022.

Sustaining Housing Market

The U.S. housing market is witnessing a solid momentum buoyed by combining factors like lower interest rates and rising need for more work-at-home space, thereby helping Toll Brothers deliver a solid performance.



For third-quarter fiscal 2021, home sales revenues grew 37% from the prior year. Homes delivered grew 28% from the prior-year quarter, with an improvement in all regions served by the company. The number of net signed contracts was also up 11% year over year, marking record third-quarter numbers. Quarter-end backlog rose 47% (55% in value) from the prior year, witnessing an all-time record high in both dollars and units. Robust demand for homes has been a boon for Toll Brothers and other companies like M/I Homes, Inc. MHO, Meritage Homes Corporation MTH as well as NVR, Inc. NVR in the same industry. While M/I Homes and Meritage Homes sport a Zacks Rank #1, NVR carries a Zacks Rank #2 (Buy) at present.

Limited Competition in the Luxury Housing Market

Luxury homes generally face limited competition, and Toll Brothers mostly offers luxury homes and communities that are located in prosperous suburban areas with easy access to major cities. The company mostly caters to luxury move-up buyers, who already possess a residence and are looking for a shift to larger and better homes. These homebuyers are less sensitive to price changes. Toll Brothers enjoys greater pricing power than other homebuilding companies.



Luxury communities in desirable locations in both high-growth and high barrier-to-entry markets lend it a competitive advantage driven by its tremendous brand image, broad range of home price points and unique build-to-order model.

Solid Earnings Growth Rate

The company has solid prospects, as is evident from the Zacks Consensus Estimate for fiscal 2021 and 2022 earnings of $6.12 and $8.69 per share, which indicates 80% and 41.9% year-over-year growth, respectively.



Zacks' Top Picks to Cash in on Artificial Intelligence

In 2021, this world-changing technology is projected to generate $327.5 billion in revenue. Now Shark Tank star and billionaire investor Mark Cuban says AI will create "the world's first trillionaires." Zacks' urgent special report reveals 3 AI picks investors need to know about today.

See 3 Artificial Intelligence Stocks With Extreme Upside Potential>>



Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

 

Toll Brothers Inc. (TOL): Free Stock Analysis Report

 

Meritage Homes Corporation (MTH): Free Stock Analysis Report

 

NVR, Inc. (NVR): Free Stock Analysis Report

 

MI Homes, Inc. (MHO): Free Stock Analysis Report

 

To read this article on Zacks.com click here.

 

Zacks Investment Research