Undervalued Stock #4: Toll Brothers (TOL)

Toll Brothers (TOL) designs, builds and markets single-family and condominium homes usually in luxury residential communities. The company also arranges financing for its homes and condos. Toll has added lower priced homes, currently in high demand, to its repertoire to attract first-time buyers. The company also develops, owns and operates golf courses and country clubs associated with its master planned communities. The company operates in 19 states in the U.S.

Currently, demand for new homes exceeds supply. Toll’s backlog of homes to build surged 19%, which bodes well for additional gains during the next several quarters. Toll’s sales will likely increase 11% during the next 12 months, while EPS could rise 30% to $3.18. The company’s April 30 backlog value rose 14% from a year ago, which bodes well for the remainder of 2017.

TOL shares sell at 13.6 times current EPS, and the company maintains a very strong balance sheet with lots of cash to fund future operations. Buy.

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Top Value Stock: Toll Brothers (TOL)

Toll Brothers (TOL: Current Price 31.32) designs, builds, markets and arranges financing for single-family and condominium homes in luxury residential communities. The company also develops, owns and operates golf courses and country clubs associated with its master-planned communities; develops and sells land to other builders; and develops, builds, operates and rents apartments.

Toll’s high concentration of communities in the luxury market segment and its valuable land holdings provide a solid base for future growth. Toll Brothers, unlike its competitors, sells each home before beginning construction. Toll is gaining market share because of superior construction and marketing.

Toll’s sales will likely advance 20% in 2017, while EPS could jump 35% to 3.10. Toll’s backlog of orders climbed 14% from a year ago, which bodes well for 2017 sales growth. TOL shares sell at 13.6 times current EPS, and the company maintains a very strong balance sheet with lots of cash to fund future operations. Management introduced a new line of homes at lower prices geared toward first-time buyers who have delayed buying a home.

I expect TOL’s stock price to rise 36% to my Min Sell Price of 42.71 within one to two years. Buy TOL at the current price.

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Toll Brothers (TOL): “America’s Luxury Home Builder”

By Timothy Lutts, Chief Investment Strategist and Editor of Cabot Stock of the Month

From Cabot Wealth Advisory 1/9/12 Sign up for free Cabot Wealth Advisory e-newsletter

There are some attractive stocks today in the housing industry, and a key reason for the strength is that the industry has bottomed. The rebound has begun. For the average stock, it’s been more than five years since the selling started, so these stocks are long forgotten by most investors. And the upside potential is so large, for both the industry and individual stocks, that it’s worth examining the stocks that are acting best in coming off the low.

One of my favorites is Toll Brothers (TOL), which styles itself “America’s Luxury Home Builder.” Toll Brothers is now operating in 20 states, selling homes that go for an average of $606,000. It was absolutely hammered in the industry’s collapse. Sales fell from $6.1 billion in 2006 to $1.5 billion in 2011, while a profit of $4.73 per share in 2006 turned into a loss of $0.87 per share in 2008 before rebounding–thanks to widespread cost reductions–to a profit of $0.24 share in 2011. Toll was featured in Cabot Top Ten Trader back in November.

Here’s what editor Mike Cintolo wrote: “There might not be a sector that’s as unloved as the homebuilders. After all, the stocks have been dogs for about five years now, and all the news surrounding the industry is poor … However, with new home construction in the U.S. sitting near 50-year lows (!) even as mortgage rates are at all-time lows, and with most homebuilders having cut costs to the bone, it wouldn’t take much of an uptick in housing activity to cause earnings to rise significantly. Toll Brothers has always been the class act of the industry, focusing on the top-end of the market, and while business has been so-so of late, management has begun to speak more positively … We think Toll and other homebuilders could be interesting speculations once the market finds its footing. As with just about every Top Ten stock, TOL has been choppy of late but continues to trade miles above its panic low in October. Moreover, selling volume has been tame after a solid-volume ramp up during the recent rally. If you’re aggressive, you could buy some around here with a loss limit of two points.”

Mike gave it a recommended buy range of 18-19. Since then, Toll has announced (on December 6) its third quarter results, which were encouraging. I particularly liked the words of Robert I. Toll, executive chairman, who stated: “We believe that a strengthening of the housing market is key to an economic recovery. It will reduce unemployment, which will improve consumer confidence and bring on more demand.

“Unemployment nationally among college graduates is well below 5%. We, therefore, believe that our customers have the ability to buy. They are aware of the tremendous affordability of homes and the record low interest rates. However, a lack of confidence in the direction of the economy is perhaps the biggest impediment to releasing what we believe is significant pent-up demand.”

TOL is now trading around 22, meaning investors who bought in Mike’s suggested range back in November are up at least 15%. And they continue to be updated on TOL’s status every week, while receiving other high-potential recommendations, every Monday. For more information, click here.

Tim LuttsTimothy Lutts
President, Chief Investment Strategist, Editor of Cabot Stock of the Month

Timothy Lutts heads one of America’s most respected independent investment advisory services, publishing eight newsletters to more than 165,000 subscribers around the world. Tim leads a dedicated team of professionals who serve individual investors with high-quality investment advice based on time-tested Cabot systems. Under his leadership, Cabot has been honored numerous times by both Timer Digest and the Hulbert Financial Digest as among the top investment newsletters in the industry. Tim also edits Cabot Stock of the Month.

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