Toll Brothers; An Outlook 2021 And Beyond
Seeking Alpha Analyst Since 2021
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Summary
- Currently trading at $50.06, we believe Toll Brothers Inc. is undervalued.
- In FY 2020, Toll Brothers recorded its largest stock repurchase of $16m at an average price of $39.75 while increasing its quarterly dividend to 38% since its inception in 2017.
- Toll Brothers compared to its peers (DHI,LEN,PHM) is the smallest by market cap at $5.5b.
TOL Brothers Inc.
We can agree 2020 was a brutal year. Many livelihoods were impacted. The pandemic has confined individuals to their homes, enticing homeowners to consider upgrading their living spaces to accommodate the shift that is currently taking place. As the nations largest luxury-home builder, Toll Brothers Inc. (TOL) is positioned to take advantage of this shift. The home builder has been named the World’s Most Admired Home Building Company five years in a row by Fortune magazine. Toll Brothers Inc. is a leader in core affluent markets from DC to Boston and builds in 24 states. Currently trading at $50.06, we believe Toll Brothers Inc. is undervalued.
Demand for housing rose in 2020 and continues to rise, marking it a sellers market. Housing starts and permits issued to build new homes have rose to their highest levels since mid-2006 according to the U.S. Census Bureau and Department of Housing and Urban Development. The housing market will continue to strengthen with white-collar workers driving demand during the health crisis as firms are offering employees the flexibility to work from home.
As the US continues to grapple with the pandemic, mortgage rates continue to remain historically low. The 10-yr treasury yield which is used as a benchmark for 30-yr mortgages, recently inched over the 1% mark for the first time since the pandemic started. Traditionally, Treasury yields closely track long-term fixed rate mortgages. In this case however, we believe history may not repeat itself due to the weekly mortgage refinance demand drop of 5%. Lenders experienced net production profits during the third-quarter surge. If origination activity declines in the future, lenders may feel pressure to keep mortgage rates relatively low.
Toll Brothers is poised to take advantage of luxury housing market in 2021. On the fourth quarter earnings call, Chief Executive Doug Yearly stated " With a strong resale market and a deep desire to nest and customize homes, our business is really clicking. Demand has been so strong that we’ve been raising prices to bring it down to a manageable level" Toll Brothers compared to its peers (DHI,LEN,PHM) is the smallest by market cap at $5.5b. The company has a price-to-book ratio of 1.25 with no significant debt maturities until FY 2022. For FY 2020 Q4, contracts were up 68% in units and 63% in dollars, highest totals for any quarter in its history with its backlog value reaching its highest point as well. FY 2021 is starting strong with deposits up approximately 48% in the first 6 weeks. In FY 2020, Toll Brothers recorded its largest stock repurchase of $16m at an average price of $39.75 while increasing its quarterly dividend to 38% since its inception in 2017.
In conclusion, Toll Brothers is a company that should be monitored as individuals with means seek to upgrade their living spaces. Supply constraints have increased home values which offers Toll Brothers an opportunity to take advantage of the strong land position and balanced footprint it boasts.
Analyst's Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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