Wall Street is forecasting annual growth of 19.98% over the next five years for this homebuilder.
Toll Brothers, Inc. (TOL)
From Validea Hot List Newsletter
Strategy: Growth Investor
Based on: Martin Zweig
Toll Brothers, Inc. (TOL) is engaged in designing, building, marketing, selling and arranging financing for detached and attached homes in luxury residential communities. The company operates through two segments: Traditional Home Building and Toll Brothers City Living (City Living). Within the Traditional Home Building segment, it operates in five geographic segments in the United States: the North, consisting of Connecticut, Illinois, Massachusetts, Michigan, Minnesota, New Jersey and New York; the Mid-Atlantic, consisting of Delaware, Maryland, Pennsylvania and Virginia; the South, consisting of Florida, North Carolina and Texas; the West, consisting of Arizona, Colorado, Nevada and Washington, and California. City Living is the Company’s urban development division. Its products include Traditional Home Building Product and City Living Product. Its Traditional Home Building Product includes detached homes, move-up, executive, estate, and active-adult and age-qualified lines of home.
P/E RATIO: PASS: The P/E of a company must be greater than 5 to eliminate weak companies, but not more than 3 times the current Market P/E because the situation is much too risky, and never greater than 43. TOL’s P/E is 12.26, based on trailing 12-month earnings, while the current market PE is 28.00. Therefore, it passes the first test.
REVENUE GROWTH IN RELATION TO EPS GROWTH: PASS: Revenue Growth must not be substantially less than earnings growth. For earnings to continue to grow over time they must be supported by a comparable or better sales growth rate and not just by cost cutting or other non-sales measures. TOL’s revenue growth is 20.24%, while its earnings growth rate is 18.73%, based on the average of the 3, 4 and 5-year historical eps growth rates. Therefore, TOL passes this criterion.
SALES GROWTH RATE: PASS: Another important issue regarding sales growth is that the rate of quarterly sales growth is rising. To evaluate this, the change from this quarter last year to the present quarter (27.7%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (9.3%) of the current year. Sales growth for the prior must be greater than the latter. For TOL this criterion has been met.
CURRENT QUARTER EARNINGS: PASS: The first of these criteria is that the current EPS be positive. TOL’s EPS ($0.64) pass this test.
QUARTERLY EARNINGS ONE YEAR AGO: PASS: The EPS for the quarter one year ago must be positive. TOL’s EPS for this quarter last year ($0.42) pass this test.
POSITIVE EARNINGS GROWTH RATE FOR CURRENT QUARTER: PASS: The growth rate of the current quarter’s earnings compared to the same quarter a year ago must also be positive. TOL’s growth rate of 52.38% passes this test.
EARNINGS GROWTH RATE FOR THE PAST SEVERAL QUARTERS: PASS: Compare the earnings growth rate of the previous three quarters with long-term EPS growth rate. Earnings growth in the previous 3 quarters should be at least half of the long-term EPS growth rate. Half of the long-term EPS growth rate for TOL is 9.36%. This should be less than the growth rates for the 3 previous quarters, which are 43.14%, 42.62%, and 74.63%. TOL passes this test, which means that it has good, reasonably steady earnings.
EPS GROWTH FOR CURRENT QUARTER MUST BE GREATER THAN PRIOR 3 QUARTERS: PASS: If the growth rate of the prior three quarter’s earnings, 54.75%, (versus the same three quarters a year earlier) is greater than the growth rate of the current quarter earnings, 52.38%, (versus the same quarter one year ago) then the stock fails, with one exception: if the growth rate in earnings between the current quarter and the same quarter one year ago is greater than 30%, then the stock would pass. The growth rate over this period for TOL is 52.4%, and it would therefore pass this test.
EPS GROWTH FOR CURRENT QUARTER MUST BE GREATER THAN THE HISTORICAL GROWTH RATE: PASS: The EPS growth rate for the current quarter, 52.38% must be greater than or equal to the historical growth which is 18.73%. TOL would therefore pass this test.
EARNINGS PERSISTENCE: PASS: Companies must show persistent yearly earnings growth. To fulfill this requirement a company’s earnings must increase each year for a five-year period. TOL, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 0.97, 1.84, 1.98, 2.18 and 3.17, passes this test.
LONG-TERM EPS GROWTH: PASS: One final earnings test required is that the long-term earnings growth rate must be at least 15% per year. TOL’s long-term growth rate of 18.73%, based on the average of the 3, 4 and 5-year historical eps growth rates, passes this test.
John Reese, Validea Hot List Newsletter, www.validea.com, 877-439-0506, April 20, 2018