Toll Brothers (TOL) is primarily a land developer and builder of executive and luxury homes; it operates in almost half of the U.S. states and is concentrated on the coasts and in the more heavily populated regions, notes Shawn Allen, contributing editor to Internet Wealth Builder.
The firm's average home price is about $700,000 in most of its regions. In California, its average home price is much higher, at $1.7 million. More recently, the company has been building and selling high-rise urban as well as low-rise suburban condos. It also now builds apartments for rent.
Home builders are relatively unique in that their revenues and earnings each quarter are based on contracts to build homes that were signed an average of nine to twelve months earlier.
Earnings per share in the latest quarter, which ended July 31, declined by 12% and that came after larger declines averaging 38% in the prior three quarters. But that was based on the decline in signed contracts some nine to twelve months previous to each quarter.
In contrast, signed contracts for new homes increased 26% in the latest quarter. They were down 22% in the quarter ended April 30, but that was strictly due to the pandemic lockdowns. Signed contracts in the two quarters before that rose 31% and 18%.
These significant increases in signed contracts in the past year mean that significant increases in year-over-year profits are essentially “baked in” for the next three or four quarters. At my analysis price of $48.66, the trailing p/e ratio is reasonably attractive at 14.9.
The price-to-book value ratio is also attractive at 1.4, especially considering the “hard” or “real” nature of its assets, the lack of purchased goodwill on its balance sheet, and its relatively modest debt levels. Return on equity is currently somewhat weak at 9%.
Based on its signed contract history, and current market conditions, Toll’s year-over-year earnings can be expected to increase for the next several quarters. Due to buybacks, the share count has decreased by 9% in the past year which should contribute to double-digit earnings per share increases. I rate the stock a "buy".
