After posting strong fourth-quarter results yesterday, Toll Brothers, Inc. (TOL) is currently down 7% for the day. The company’s sales rose in the quarter, driven by low borrowing costs and changing living preferences due to the pandemic. The home builder generated $2.6 billion in revenue, which was up 7% year over year. This was ahead of an average analyst estimate of $2.08 billion.
Revenue from home sales increased 9% to $2.5 billion. Earnings came in at $1.55 a share, considerably higher than the estimated $1.23 a share, and up 10% year over year. Homebuilding stocks have performed exceptionally well since their March lows. This is due to a massive exodus from cities into suburban areas.
Initially, there was a pause in homebuyer demand in March and April due to stay-at-home orders and increased unemployment, but the industry saw a strong recovery for new single-family homes. Buyers have also been enticed by low mortgage rates, which hit a new low last week. Plus, the limited number of homes for sale is driving up prices and increasing demand for new homes.
The pandemic led to an increase in remote working, and if employees are going to work from home, they don’t need to live in the cities. Besides, the millennial generation is changing their living preferences as they start to think about families. This trend should continue over the next few years, providing substantial growth to homebuilders such as TOL.
TOL Chief Executive Douglas Yearley remarked, “We are currently experiencing the strongest housing market I have seen in my 30 years at Toll Brothers, and we continue to increase prices in nearly all of our communities,” Chief Executive Douglas Yearley said in prepared remarks.”
With such a great quarter, the question is: Why is the stock down so much today? While TOL’s homebuilding deliveries rose 10% last quarter, to 2,940, the company forecasts 1,675 home deliveries in the first quarter with an average price between $780,000 and $800,000. This is less than the consensus estimate of 1,882 deliveries at an average price of $815,000. This is driving the price of the stock lower today.
Today’s sell-off could present an opportunity for investors to scoop up the company at a discount. According to StockNews Analysts Price Targets, TOL currently has an average price target of $50.47 based on fifteen analysts. This provides a potential upside of 10% based on its current price.
The company also faces limited competition in its market of luxury homes. TOL offers homes in thriving suburban areas that are accessible to major cities. Its higher-priced homes provide better pricing power than other companies in the industry. In fact, the demand for million-dollar homes is growing faster than other housing price tiers. For instance, applications for mortgages larger than $766,000 increased by 59% in October.
Toll Brothers is also looking to expand its brand to new product lines and add more affordable luxury communities to broaden its footprint and customer base. Due to pent-up demand in housing, TOL has secured highly sought-after locations in the country, specifically in the Northeast, where land is scarce.
The company’s success over the last eight months has led to a “Strong Buy” rating in our POWR Ratings system. It holds a grade of “A” for Trade Grade, Buy & Hold Grade, and Peer Grade. TOL is also the #1 ranked stock in the Homebuilders industry.
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TOL shares were trading at $45.31 per share on Tuesday afternoon, down $3.90 (-7.93%). Year-to-date, TOL has gained 16.25%, versus a 16.59% rise in the benchmark S&P 500 index during the same period.
About the Author: David Cohne
David Cohne has 20 years of experience as an investment analyst and writer. Prior to StockNews, David spent eleven years as a Consultant providing outsourced investment research and content to financial services companies, hedge funds, and online publications. David enjoys researching and writing about stocks and the markets. He takes a fundamental quantitative approach in evaluating stocks for readers.
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