Toll Brothers (TOL, Financial) ended the fiscal year on a strong note. The company delivered strong revenue and earnings growth. But, despite strong results, the company’s shares fell by 2.8%. Let us take a look at the overall housing market, and see if Toll Brothers can improve in the long run.
The results
In the recently reported quarter, Toll Brother’s fourth quarter revenue improved by 29.3% to $1.35 billion. The company is pleased with this figure as it came just in line with the guidance it previously released. On the earnings front, Toll Brothers posted EPS of $0.71 per share which is also impressive as it was $0.17 per share better than what it posted in the same quarter last month. However, the earnings fell slightly short of consensus estimates by $0.02 per share.
Toll Brothers seems to be in good shape. The momentum is expected to keep rolling in future as its recent fourth quarter results indicate. The management of the company is also looking forward to align itself in its profitability story. It is now seeing many positive signs which it thinks can be drivers of Toll Brothers’ success story. However, the company is losing market share to an extent due to soft housing market and defensive attitude from the investors towards the housing companies.
Still the management thinks that it is strategically lined up to overcome this situation and maintain its profitability. It is now focusing on some of its key markets also extending its product offerings across these geographies. It is also engaged in diversification strategy under which it is diversifying its business lines which will also strengthen its position in the market.
Smart moves
It has made some wise moves in the past which are benefiting the company now. In California Toll Brother closed an acquisition of Shapell Homes in $1.6 billion which enlarged Toll Brothers’ regime. With this the company now has access to 5000 homes in the coastal communities. This also will help Toll Brothers to expand its California operations. Toll Brothers can now build homes and sell its to other builders generating additional income for the company.
The company is slightly worried about the soft housing market as due to this they are losing market share as investors are playing defensive and are waiting for concrete signs in the housing industry. However, this should not affect Toll Brothers as its growth momentum is strong. It is seeing strong contract growth and as compared to the last years its contract growth is accounting a good 16% growth which is a positive sign.
Further, the company is also laser focused on Urban Metro New York City market. It is also focusing on stretching its presence in the market and under this, Toll Brothers is continuously expanding its Apartment living pipeline for urban and sub-urban for rent-up projects. This will help the company to improve its market presence and also improve its financial position.
The company further expects that the housing will show a slow recovery but it is not going to affect Toll Brothers’ growth momentum. Despite, weak housing, the home sales are still near normal levels. So these will should not surprise the investors as well.
Conclusion
Moving on to the fundamentals and valuation of the stock, with a trailing P/E of 17.67 the stock is cheap and forward P/E of 12.85 shows steady earnings growth in the near term. The long term prospects of the stock also looks promising as the company earnings for the next five years are growing at a CAGR of 21.77% which is more than the industry average of 17.96%.
All these facts and statistics shows that the Toll Brothers’ good financial position is paying off well to the company and the company is expected to post better results in future as well despite soft housing market. As of now Toll Brothers is a good pick and the investors should definitely include it in their portfolio.
