Home builders have been doing very well for the last few months, and with good reason. One of the biggest new trends in the United States—and in much of the world, it seems—comes from the increasing desire to stay home. Whether this is a natural desire stemming from simple self-interest, or a reasonable response to unreasonable conditions, is up for debate. It makes home a much more attractive place, and Toll Brothers (NYSE:TOL) is taking this trend all the way to the bank.
Building Houses is a Building Business
It was a fine quarter for the homebuilder, along with much of the homebuilding market. The company brought in $199.3 million for the quarter in net income, along with an earnings per share (EPS) figure of $1.55. Given that analysts were expecting Toll Brothers to turn in a figure of $1.23 per share, that's a clear win for Toll Brothers.
Sales figures also did quite well against expectations; the company posted total sales of $2.55 billion, which is excellent when compared against consensus expectations of $2.08 billion.
The figures dull a bit when compared to the recent past, however. The company brought in $202.3 million in the fourth quarter of 2019, which is a hair over the $199.3 million posted this year. However, the company's $1.55 EPS figure does well against the $1.41 per share in the fourth quarter, so even with that small ding, the company still comes out well.
When questioned, CEO and chairman Douglas C. Yearley, Jr., pointed out that the current housing market was the strongest that he'd seen in 30 years with the company. Given that 30 years ago includes the dot-com bubble era, that's a powerful statement. The low interest rates certainly spurred plenty of buyers on, and people's desire to stay home led to a growing demand for nicer houses, many of which were wanted in lower population-density areas.
Site Prep in Progress for Bigger Gains?
The analyst picture, according to our latest research, suggests an improving proposition for Toll Brothers ahead. The consensus is at a “hold”, but it's a consensus that's been steadily improving for the last three months, to the point where it now looks like the consensus from six months ago. Currently, the company has five “sell” ratings, six “hold” and six “buy”. Six months ago, the ratio was three “sell”, nine “hold” and four “buy,” which is pretty much the same proportionally. Three months ago, the company slipped with five “sell”, seven “hold” and four “buy.”
Thus, our research finds that, while there's still an active “sell” presence in the field, it's nearly perfectly counterbalanced by a similarly active “buy” presence around a core of “hold”. In a noteworthy point, the company's price target has been steadily on the rise since six months ago, going from $37.43 to $44.20. Given the company's current share price of $45.80, though, some adjustments are likely to emerge in the near-term. Very little such adjustment has taken place lately, as yesterday, BTIG Research increased its price target to $40 from the original $36, but lowered its appraisal to “sell”. Truist, meanwhile, a couple of weeks back upgraded from “hold” to “buy” and took the price target from $45 to $60.
Banking on Trends
The good news is that, regardless of what happens, Toll Brothers will have a certain amount of need going forward. If worse comes to worst, the company can probably branch off fairly readily into home repair; who knows more about what could go wrong in a house than a company that builds them? However, it's clear that Toll Brothers' recent gains have something of a shelf life to them as they're very heavily based on current trends.
The company is enjoying hefty growth on the back of low interest rates and a changing national mood that prefers staying at home. People took vacation budgets and plowed them into home improvements, and they're likely to continue doing so as the lockdowns don't look like they'll slow down any time soon, depending on where you are.
However, with a growing vaccine movement, with new therapeutics coming out, and work-from-home movements already under pressure to get back into the office, the Toll Brothers expansion may have some limits. Toll Brothers will likely continue to have its way for a while longer, but start watching the trends. There are simply too many potential points of failure for Toll Brothers to be an unrestricted buy, and if people start leaving the house more or interest rates start to rise, that's going to take a good chunk of Toll Brothers' prosperity along with it. So buy in, enjoy the ride up, but be ready to bail out.
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