Toll Brothers (TOL) is primarily a land developer and builder of executive and “affordable luxury” single-family homes, notes Shawn Allen, contributing editor to Internet Wealth Builder.
It operates in almost half of the US states and is concentrated on the coasts and in the more heavily populated regions. More recently, the company has diversified into building and selling high-rise urban as well as low-rise suburban condos. It also now builds and owns rental apartments.
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 each of the past four quarters have been running at about double the level of the prior year. Signed contracts in the past four quarters have continued to rise although at a lower rate of 10% in the latest quarter.
Management is projecting earnings per share growth of 50% in the next year and expects the US housing market to remain robust for the foreseeable future. The dividend is modest at $0.17 quarterly ($0.68 per year), for a current yield of 1.0%.
At my analysis price of $70.48, the trailing p/e ratio is very attractive at 10.4. Based on analysts’ forecasts for increased earnings, the forward p/e ratio is very attractive at 7.5. But we should keep in mind the cyclic nature of earnings.
The price-to-book value ratio is reasonably attractive at 1.7, 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. The return on equity has recently increased to 17% and management expects it to exceed 20% in the next year.
TOL has a very volatile history, driven by booms and busts in the home building industry as well as in the economy and financial markets. More recently, the stock was up 10% in 2019 and then surged 66% in 2021 as home building boomed.
Action now: Buy. This stock is cheap in relation to its earnings and prospects.
