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Toll Brothers: Cautiously Optimistic After The Post-Earnings Drop

Mar. 01, 2020 9:07 PM ETToll Brothers, Inc. (TOL)


  • Toll Brothers declined more than 14% after reporting slower than expected earnings.
  • The company saw strong new orders growth and expects a stronger housing market going forward.
  • While the market is currently very hostile, I expect the stock to bottom around current prices.

Toll Brothers (NYSE:TOL) is one of my favorite homebuilding stocks. Not because this is the best stock to be long (it is not), but because the company is focused on high-income customers and is selling houses at much higher prices compared to its competitors. This makes the stock a great tool to track homebuilding activities in that segment. Unfortunately, while I have been a homebuilding bull for some time, this stock has not been on my buy list as I discussed in my article published in December of 2019 as well. High-ticket housing is not the place to be, and Toll Brothers' long-term underperformance is only further supporting this case. Either way, the just-released first-quarter results show that earnings came in below expectations while new orders accelerated. The stock sold-off immediately in an already ugly environment thanks to the coronavirus. Nonetheless, I believe the sell-off has priced in a lot and considering that housing is recovering due to low rates, I think this stock is turning slowly into a buy.

Source: Toll Brothers

What Happened In Q4?

One of the reasons why Toll Brothers has underperformed its peers is its focus on more expensive homes. Only 21% of total deliveries have a price tag of less than $500,000. The company offers these homes in 23 states and 50 major housing markets. In 2019, the company added 7 new markets. Besides the company's large domestic exposure, it needs to be said that the company is servicing clients with a high FICO score. On a full-year 2019 basis, the average FICO score was 762. 22% of transactions were done with cash buyers.

With that said, let's look at the company's results. As you can see, the past three quarters all showed negative EPS growth. The just-released fourth-quarter earnings came in at $0.41. This is below consensus expectations of $0.46

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