This home builder beat analysts’ earnings estimates by $0.07 last quarter, and its shares were recently upgraded by RBC Capital Mkts to ‘Outperform’.
Toll Brothers Inc (TOL)
From Argus Weekly Staff Report
We continue to see evidence that validates our bullish thesis on BUY-rated Toll Brothers Inc. (TOL). Our target price is $43.
Toll is the largest homebuilder serving the luxury market. We believe that Toll’s access to capital is an advantage over small and mid-sized builders that are privately owned. The company’s strength could have additional value in an environment where very selective lenders serve the
homebuilding industry.
Access to capital is essential in acquiring scarce building lots in areas that have the attributes that wealthy buyers want: good schools and easy access to employment centers, major cities, cultural institutions and top medical centers.
Our analysis suggests favorable supply/demand conditions at the high end of the housing market as a result of limited access to capital by small and mid-sized privately-owned builders, several years of pent-up demand, and a shortage of approved home sites in high-employment markets.
An offset is that many carpenters have left the industry and some builders are seeing cost pressures for a reduced workforce. In FY14, TOL demonstrated its financial strength in the $1.6 billion acquisition of Shapell Homes and that company’s 5,000 home sites in the highly desirable coastal California region.
Toll’s customers tend to be financially secure, which reduces their sensitivity to interest rates relative to more budget-conscious buyers. Wealthy buyers also have cash to spend on upgrades. The average TOL buyer added $155,000 in upgrades in FY16, up 6% from FY16. That’s 80% of the price of the average U.S. home.
TOL’s customers generally have strong credit scores and are able to obtain a large mortgage if they need one at all. We believe that approximately 20% of deliveries were for cash in FY16, and that the average buyer makes a down payment of 30%. About 50% of buyers are empty nesters. The average TOL buyer has a credit score of approximately 757.
We note that TOL has a committed backlog of $4.35 billion, with an average home price of about $845,000. We continue to expect strong revenue and earnings growth to drive share price appreciation over the next two years. We believe that TOL is well-positioned in a housing recovery that remains on track.
We are raising our FY17 earnings estimate to $3.16 from $3.15 per share. In 1Q, the company signed contracts for 1,522 homes valued at $1.24 billion. This was up 14% in dollars and 22% in units from the prior-year quarter. This was better than the Street Account consensus which called for 1,407 contracts.
The shares are trading at 15-times trailing earnings, 11-times our FY17 EPS forecast, and 9.9-times our FY18 estimate. Due to significant share price and earnings volatility, as well as weakness in the company’s core markets during the recession, the forward P/E ratio has ranged from 9 to more than 60 over the last five years. As such, we value the shares using our dividend discount model, which points to an intrinsic value of $42 per share. We believe the shares are attractively valued at about 1.3-times book value, slightly below the median of 1.7 for a group of homebuilders tracked by Bloomberg. We believe that the company’s unique position as the dominant builder of luxury homes argues for a premium.
At 15-times forward four-quarter earnings, the shares would be worth $48. Toll’s multiple of 11-times FY17 consensus earnings is just above the peer average of 10.7. The company’s P/E to growth ratio of 0.8 is below with the peer median of 1.1. We believe this is attractive, given TOL’s unique positioning in the luxury home segment.
We remain upbeat on the housing recovery and the company’s leading position in the luxury market. We also believe that the company’s substantial contracted backlog provides good earnings visibility over the next 3-4 quarters.
Jim Kelleher, CFA, Argus Weekly Staff Report, www.argusresearch.com, 212-425-7500, April 7, 2017