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Toll Brothers today

TOL

Toll Brothers

$133.85 -4.61 (-3.33%)

(As of 12/13/2024 ET)

52 week range

$95.46

▼

$169.52

Dividend yield

0.69%

P/E ratio

8.91

Target price

US$152.53

Shares Toll Brothers, Inc. New York Stock Exchange: TOL fell more than 5.5% the day after the company reported earnings for the fourth quarter and full year 2024. This was a strong report by almost all measures. However, the company is entering what is typically its lightest quarter in terms of revenue.

If the past is any indication, the company’s stock could trade sideways for several months. However, history also suggests that patient investors may view this as a good opportunity to buy the dip.

The headlines about Toll Brothers were very strong. Revenue of $3.33 billion beat analysts’ estimates by $3.17 billion and was more than 10% higher than last year (YoY). Adjusted earnings per share (EPS) of $4.63 were more than 6% higher than analysts’ estimates of $4.34 and were 12.6% higher year-over-year. The company’s operating margin of 18.3% remained the same as last year.

For many, owning their own home is a top priority. Millennials are more likely to purchase their first home. This generation has spent the last 10 years riding one of the hottest stock markets in recent memory. In addition to accumulating their own wealth, this generation is the beneficiary of one of the largest wealth transfers in recent memory: aging boomers are passing on some of their accumulated wealth to their adult children.

There’s more to this luxury home builder’s growth story. Many home buyers are looking for new builds that are move-in ready as premiums to buy new have fallen from the historical average of about 17% to about 3%.

All of these trends are fueled by the Federal Reserve’s push to lower interest rates, which is helping homebuilders. This is especially useful for a luxury home builder like Toll Brothers, which is actively seeking to increase its inventory.

Much has been said about the impact of rising mortgage rates on the housing market. There is no doubt that this will have an impact on existing homeowners who may be reluctant to part with the mortgage they got at 2% or 3%.

However, as investors saw last month, the bond market may encourage investment in TOL stock. Stocks rose after the election, but the downward move began in the last week of November. This coincided with a fall in bond prices, causing mortgage rates to rise.

However, that doesn’t have as much of an impact on Toll Brothers, which has a wealthier customer base that is more likely to pay cash for its homes. In 2024, Toll Brothers delivered 11,400 homes to buyers earning more than $200,000. That’s roughly 2% of the company’s estimated addressable market of 575,000 transactions.

Shares of homebuilder TOL have seen explosive growth over the past 12 months, up about 58%. This is much stronger than many construction stocks, as well as any results the company has achieved over longer periods of time. This confirms how strange the real estate market has been over the past five years.

But investing in an anomaly can be precarious. In this case, let the trend be your guide. Since the first quarter of the new fiscal year is Toll Brothers’ weakest quarter in terms of revenue, the volatility in TOL stock prices has historically contributed to this.

This did not happen in 2024, but investors appear to have corrected this anomaly after taking profits. TOL shares are trading near the consensus target price of $150.33 and could continue to fall. Following the earnings report, MarketBeat reports that Keefe, Bruyette & Woods downgraded the stock from Outperform to Market Perform and cut its price target from $168 to $164.

Another trend favoring long-term investing is a company’s commitment to shareholder value. Since 2016, the company has repurchased about 50% of its shares. The company also paid increasing dividends, with a three-year annual growth rate of more than 23%.