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Toll Brothers (TOL) has had an interesting past five years, trading between $15 and $25 during most of that time. As the economy gets better, Toll might stand to benefit because of the increase in the demand for housing. Here are the six things I looked at while researching the stock:

Valuation: Toll Brothers' trailing five-year valuation metrics suggest that the stock is overvalued as all of the metrics are above their respective five-year averages. Toll Brothers' current P/B ratio is 1.5 and it has averaged 1.2 over the past five years with a high of 1.5 and low of 0.9. Toll Brothers' current P/S ratio is 2.6 and it has averaged 1.5 over the past five years with a high of 2.4 and low of 0.6. The trailing five-year P/E range is not very useful because of the tough time home builders have had over the past five years.

Price Target: The consensus price target for the analysts who follow Toll Brothers is $24. That is upside of 2% from today's stock price of $23.7 and suggests that the stock is overvalued at these levels. This also suggests that the stock has limited upside and should be avoided at its current stock price.

Forward Valuation: Toll Brothers is currently trading at about $24 a share with analysts expecting EPS of $0.74 next year, an earnings increase of 118% year/year, for a forward P/E ratio of 32. Taking a look at the company's publically traded comparisons will give us a better idea of the stock's relative valuation. KB Home (KBH) is currently trading at about $12 a share with analysts expecting EPS of $0.39 next year, for a forward P/E ratio of 30.7. D.R. Horton (DHI) is currently trading at about $15 a share with analysts expecting EPS of $0.81 next year, an earnings increase of 62% year/year, for a forward P/E ratio of 17.9. PulteGroup (PHM) is currently trading at about $9 a share with analysts expecting EPS of $0.54 next year, an earnings increase of 145% year/year, for a forward P/E ratio of 16.8. The mean forward P/E of Toll Brothers' competitors is 21.8, which suggests that Toll Brothers is overvalued relative to its publically traded competitors.

Earnings Estimates: Toll Brothers has beat EPS estimates three times in the past four quarters. The company's EPS figures have come in between -8 cents and 22 cents from consensus estimates or about -200% to 733.3% from analyst estimates. The company has reported earnings that have differed from analyst estimates by a wide margin, which suggests that the stock may experience upside from earnings surprises.

Top Stock Holders: The top two funds that own Toll Brothers are Fidelity Growth Company, which owns 7.5 million shares or 4.52% of the shares outstanding, and Vanguard Windsor Investor, which owns 6.2 million shares or 3.69% of the shares outstanding. The top two institutions that own Toll Brothers are Fidelity Management and Research Company, which owns 25.1 million shares or 15% of the shares outstanding, and Wellington Management Company, LLP, which owns 8.5 million shares or 5.1% of the shares outstanding.

Price Action: Toll Brothers is up 9% over the past year, outperforming the S&P 500 (SPY), which is up 4.5%. Looking at the technicals, the stock is currently above its 50-day moving average, which sits at $22.04 and above its 200-day moving average, which sits at $18.5.

Conclusion: All of the valuation metrics suggest that the stock is overvalued. However, it seems like the traditional valuation metrics may not be such a good way to value the stock here as the housing market has been very depressed over the past five years. It may make more sense to treat the stock as a call option on the housing market with little to no downside based on the depressed housing conditions over the past five years. It ends up being a call on the normalization of housing starts versus on the stock.

Source: Toll Brothers: A Call Option On The Housing Market