Luxury Homes Boost Toll Brothers

03/17/2016 7:00 am EST

Focus: STOCKS

Shawn Allen

Contributing Editor, Internet Wealth Builder and The Income Investor

Our latest recommendation is primarily a builder of luxury homes; its average home price is about $700,000 in most of its regions—and in California, its average home price is at $1.6 million, notes Shawn Allen in Internet Wealth Builder.

Toll Brothers (TOL) is vertically integrated in that it also has large land holdings and acts as the developer of its own communities.

It also is active in providing mortgages to its homebuyers although it then appears to sell the mortgages to other financial institutions.

The company operates in 19 states in four regions of the United States. It has 3,900 full-time employees.

It also has other businesses of increasing importance, including selling lots to other builders, building luxury high rise condos in large cities, and building and renting apartment units in selected large cities.

TOL's share price fell substantially from about $36 in December to as low as the $24 range in early February but has now recovered.

The company responded to the price drop by aggressively increasing its share buy back program.

Earnings have been rebounding, albeit with some volatility, in line with the recovery of the US economy, American home prices, and new home starts. Toll's adjusted earnings were up 7.6% in 2015 after doubling in fiscal 2014.

In 2015, Toll Brothers was once again named builder of the year and topped a Fortune Magazine survey as the world's most admired homebuilder.

Even more impressive, a separate Fortune survey ranked Toll Brothers as sixth in the world in terms of its reputation for quality of products and service.

The P/E ratio is 14.2 and the price to book value ratio is 1.3. Return on equity is 9.2% and has been rising, albeit with some volatility, for several years with the housing recovery. In isolation, these ratios would suggest a buy rating.

The profit outlook is for strong growth of about 20% in the next few quarters based on contracts signed about one year previous to each quarter.

The overall thesis in buying Toll Brothers is that it is a well-managed company selling at a somewhat discounted price, which provides a way to benefit from the continuing recovery in US home building starts and prices. Buy for capital appreciation.

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