In 2020, when all anyone could really think of was making their home a nicer place to spend a lot of time in, Toll Brothers (NYSE:TOL) was cleaning up thanks to a rush of new homebuilding activities. The homebuilder just turned in a fantastic quarter, and reports suggest that, despite a fundamental change in the market, it's likely to continue delivering big results for some time to come.
A Winning Quarter Amid the Right Environment
Toll Brothers' fourth quarter turned in fantastic numbers, as the company brought in earnings of $0.76 per share against FactSet estimates that looked for $0.46 per share. The fact that Toll Brothers nearly doubled estimates is exciting enough, but it only gets better in comparison with last year at this time. Last year, the company posted earnings of $0.41 per share for its fourth quarter of 2019.
Revenue, meanwhile, also beat estimates as Toll Brothers posted $1.56 billion in revenue. Analysts looked for $1.34 billion in revenue, and the current quarter's revenue beat the same time the preceding year by fully 17%.
Looking at the individual sectors revealed a company firing on all cylinders. Revenues from home sales—the company's primary stock in trade—were up 8.7% overall, while contracted homes were up nearly 60% from the same time a year prior. The contracted value of homes, meanwhile, rose 68% as well to $2.51 billion total, and home building deliveries were up 10% against the same time the preceding year.
Bullishness Retracting a Bit From Analysts
The broader analyst pool, meanwhile—as based on our latest research—is issuing some cautious notes, though sentiment is higher than it's been in some time. For the last six months, the company has had a consensus rating of “hold.”
Six months ago, the company had five “sell” ratings, seven “hold” and four “buy” to its credit, the low-water mark for the last six months. That improved three months ago, as the ratios swing to five “sell”, six “hold” and six “buy.” A month ago, the ratios reached their most bullish point yet with five “sell” ratings, six “hold” and seven “buy.” Now, that's backed off a bit, as we're at five “sell”, seven “hold” and six “buy.”
The price target, meanwhile, has plateaued. Six months ago, it sat at $40.31 before jumping up to $43.81 three months ago. A month ago, it made one last leap to $45.60, where it sits today. Some staleness in the price target may be a possibility, however. So far, only Wedbush has changed its expectations for 2021, downgrading the company from “outperform” to “neutral,” and that happened back on January 28.
Working Several Factors at Once
The good news about Toll Brothers is that, indeed, it's likely to continue producing excellent results for at least the next few quarters. It's a safe bet that it can't continue to expand forever, but a combination of factors are driving the company's gains, and these factors won't all stop at the same time.
Yes, there's going to be some softness in the stock as people stop needing home offices. Home offices are likely to remain a desirable attribute, however, and those who can work from home have likely discovered by now that they'd like to continue working from home, at least part of the time. That's going to call for home office space and, by extension, new home building.
Better yet, Toll Brothers actually has an idea of what home building demand will be like for the foreseeable future. Thanks to the nature of the product, Toll Brothers has a backlog in place, which demonstrates that the company will be working to meet backlogged demand for some time to come. It can actually bring forward demand from the past, because it takes so long to construct a home.
Plus, Toll Brothers is likely to continue to have demand for a while as well; remember that it's not just home offices that drove interest in Toll Brothers housing to begin with; there were also key demographic shifts as people discovered they no longer need to live in a major city to work thanks to remote working tools. There were also issues of safety as people were looking to buy houses in rural areas thanks to ongoing unrest in the cities. Throw in low mortgage rates that don't seem likely to go up any time soon and
Toll Brothers has several functions working for it, and it's going to be able to work the overhang in demand from the pandemic era forward for a good while to come. That improves the odds that Toll Brothers will be able to keep up its positive earnings reports for at least the next few months to come, and makes it a good short-term investment if absolutely nothing else.
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