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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.

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.

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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.

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


Meritage Homes Corporation (MTH): Free Stock Analysis Report


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


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