This story originally appeared on Zacks
Although historically-low inventory level, rising prices, supply chain bottlenecks, and affordability issues have been taking a toll on the U.S. housing market these days, strong demand arising from the strengthening job market is a tailwind. Also, a rise in mortgage rates is driving market sales. It is to be noted that properties typically remained on the market for 18 days in November 2021, down from 21 days a year ago. Also, 83% of homes sold were on the market for less than a month, according to the National Association of Realtors.
Among the industry bellwethers, Toll Brothers Inc. TOL has been riding high, given the strategy of broadening product lines, price points and geographies. Prudent inorganic drive and the lack of competition in the luxury new home market also act as major tailwinds for this Horsham, PA-based homebuilder.
Shares of this Zacks Rank #1 (Strong Buy) company have gained 47.3% over the past year compared with the Zacks Building Products – Home Builders industry’s 23.1% rally. The stock has also fared better than the Zacks Construction sector and S&P 500 Index’s 17.9% and 23.7% rally, respectively. The solid price performance was backed by the above-mentioned factors and an impressive earnings surprise history. Its earnings surpassed the Zacks Consensus Estimate in the trailing 16 quarters.
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Earnings estimates for fiscal 2022 have moved 6.9% north over the past 30 days, depicting analysts’ optimism over the company’s prospects. This bullish trend justifies the stock’s addition to investors’ portfolio. You can see the complete list of today’s Zacks #1 Rank stocks here.
Let’s delve into the driving factors.
Focus on Affordability
The company continues to look for opportunities to expand its luxury brand to new product lines and price points, in a bid to maintain leadership in the luxury segment. At the same time, the company has been strategically adding more affordable luxury communities in view of the current demographic trends and expanding footprint and customer base. These communities are expected to be more capital efficient.
Management is now targeting community count growth of 375 for fiscal 2022, indicating 10% growth from the fiscal 2021 level, which will reflect accelerating land acquisition and development to meet the resurgence in homebuyer demand. TOL’s extensive geographic footprint and deep land position will allow it to grow its community count in fiscal 2022 and beyond, attributable to faster-than-expected sale of the existing communities.
Toll Brothers is using its strong liquidity position to secure the most sought-after urban locations in the country like the New York City Market, Northern New Jersey, Washington DC and Philadelphia. The company’s solid land position places it well to meet the growing demand in these regions, thus giving it a competitive edge over its peers who are presently facing land availability constraints.
On Aug 12, 2020, it acquired an NV-based privately-held homebuilder, StoryBook Homes, thereby strengthening its foothold in the Las Vegas housing market. In September, Toll Brothers expanded into the Colorado Springs market through the acquisition of Keller Homes, one of the top private homebuilding companies in Colorado Springs. In fiscal 2021, it invested $1.9 billion in land acquisition and development.
At fiscal 2021-end, Toll Brothers had $3.45 billion of total liquidity, comprising $1.64 million in cash and cash equivalents and $1.81 billion availability under the revolver capacity. The revolving bank credit facility will not mature until November 2026.
Recently, the company repaid the remaining $410 million of 5.875% notes that were due February 2022. It has no significant debt maturities until April 2023.
Meanwhile, the company’s long-term debt as of Oct 31, 2021 amounted to $3.56 billion, down from $3.59 billion at fiscal third quarter-end. Also, its debt to capital for the reported quarter was 40.2%, down from 41.6% at the end of fiscal third-quarter 2021.
Driving Shareholder Value
The company has been consistently driving shareholder value by returning cash to shareholders through regular share repurchases and dividend payments. During fiscal 2021, Toll Brothers repurchased nearly 7.42 million shares of its common stock at an average price of $50.97 per share for approximately $378.3 million.
Meanwhile, on Mar 9, 2021, it announced a 54.5% hike in its quarterly dividend to 17 cents per share (or 68 cents annually) from 11 cents (or 44 cents annually). This move highlights the company’s stable financial position and commitment to reward shareholders.
Solid Earnings Growth Rate
TOL has solid prospects, as is evident from the Zacks Consensus Estimate for fiscal 2022 earnings of $9.70 per share, which indicates 46.3% year-over-year growth.
Other Top-Ranked Stocks From the Same Industry
D.R. Horton DHI currently carries a Zacks Rank #2 (Buy). This Texas-based prime homebuilder continues to gain from industry-leading market share, a solid acquisition strategy, a well-stocked supply of land, lots, and homes along with affordable product offerings across multiple brands.
D.R. Horton’s earnings are expected to rise 27.7% year over year in fiscal 2022.
Lennar Corp. LEN currently holds a Zacks Rank #2. This Miami, FL-based homebuilder continues to gain from effective cost control and focus on making its homebuilding platform more efficient, which in turn is resulting in higher operating leverage.
Lennar’s earnings are expected to rise 9.3% year over year in fiscal 2022.
Meritage Homes Corporation MTH currently carries a Zacks Rank #2. Its successful execution of strategic initiatives to boost profitability and focus on entry-level LiVE.NOW homes bode well.
Meritage Homes’ earnings are expected to rise 23.4% year over year in 2022.
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Toll Brothers Inc. (TOL): Free Stock Analysis Report
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