Toll Brothers (TOL) is primarily a residential 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.

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 67% in 2021 to $72.39 as home building boomed. But it has since plunged 37% in 2022 to date. It’s not been a stock for the faint of heart.

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 rose 63% and had doubled in the fiscal year ended Oct. 31, 2021.

Signed contracts in the latest quarter rose 2% in terms of number of houses but 10% in value. In the latest fiscal year, signed contracts were up 26% in units and 44% in dollars.

Management is projecting earnings per share growth of 50% in 2022 and expects the US housing market to remain robust for the foreseeable future despite higher interest rates. The stock market appears not to agree with this rosy outlook. The average rate on a 30-year mortgage has risen to 5% versus 3.4% one year ago. The impact on Toll Brother’s home sales remains to be seen.

The trailing p/e ratio seems extremely attractive at 6.1. Based on analysts’ forecasts for increased earnings, the forward p/e ratio is even more attractive at 4.8. But we should keep in mind the cyclic nature of earnings. The dividend is relatively modest at $0.20 quarterly ($0.80 per year), for a current yield of 1.7%

The price-to-book value ratio is quite attractive at 1.1, 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 19% and management expects it to exceed 20% in 2022.

Action now: Buy. This stock is cheap in relation to its earnings and prospects. But be aware of its volatile history.