Housing Growth Will Power This Homebuilder's Performance

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Mar 11, 2015

The recovery in the housing market is positively affecting companies dealing in this area, and Toll Brothers (TOL, Financial) is one such beneficiary. The company had a solid start to the new fiscal year, delivering another strong quarter of financial performance. As the housing market is showing some more signs of recovery, Toll Brothers is optimistic about its solid performance in the future as well. Toll Brothers has also purchased land at some prime locations, which are seeing good home prices.

Strong results and outlook

Toll Brothers impressed everyone with its results. The stock also has been consistent on the stock market and has gained much on the back of its results. The stock rose almost 4% after it posted strong earnings and revenue numbers and has also raised its guidance for 2016. The company enjoys a strong position in the market as a luxury home builder. Toll Brothers is now looking for highlighting its presence more in the market to have a better share of the pie. Under this, California land purchases stand out for Toll Brothers whose presence is significantly improved with the acquisition of Shapell Homes.

Moving ahead, in Houston, Toll Brothers is pleased to see good progress in sales per community. The company is now focusing on adding more value to it. Under this, it is planning to sell about 400 lots to third party builders; in fact it has also succeeded in dealing with some of the potential builders in this regard. This is expected to ramp up company’s sales strongly with solid earnings growth on the sale of these high quality land positions of it in 2016.

The housing market

The data released of the latest analysis and researches portrays a healthy image of the overall housing market. The sale of existing homes is increasing at impressive rate. It soared about 2.5% more as compared to the same period last year. Further, the job market is improving at a good pace which is a good opportunity for the home builders such as Toll Brothers, and they are optimistic about it, too. In addition, the latest data from the Labor Department indicating solid job and wage growth momentum is also encouraging showing solid household formations. This will surely boost the household formation, providing a basis for stronger housing demand in future.

Moving on, the recovering U.S. economy is also playing a major role in the housing recovery. The government policies for housing loans are now more flexible along with the increase in the mortgage availability. These are some of the bright spots supporting housing recovery.

Despite these favorable signs, Toll Brothers is expecting certain short term headwinds. As the growth in the jobs is robust, the Federal Reserve might raise the interest rates and higher interest/mortgage rates might hurt Toll Brothers’ margins fractionally.

Competitors

The housing recovery is favorable for all the other players in the play along with Toll Brothers. However, Toll Brothers is in a solid financial position to grab this opportunity but it can face stiff competition with two of its peers namely DR Horton and PulteGroup which are also seeking better profitability in this favourable housing market. Looking at the statistics, DR Horton with EBITDA 961.40 million and PulteGroup with EBITDA 754.39 million are definitely better than Toll Brothers with EBITDA of 511.23 million in terms of cash flow. But based on the price to earnings ratio, Toll Brothers is definitely a better competitor. There is surely a neck to neck competition, but Toll Brother should be watchful as these two competitors can be better than it in a long run.

Now moving on to the fundamentals, with a trailing P/E of 18.25 the stock looks reasonable and the forward P/E of 13.99 shows good growth in the earnings in the near term. As the Federal Reserve might raise the interest rates the investors are already speculative about the stock. But a solid profit margin of 9.12% will surely win investors’ confidence. As of now the stock is a good pick and investors can surely include Toll Brothers in their portfolio.