Toll Brothers Delivers, but Shares Fairly Priced
Strong results coupled with excellent new-home sales figures have propelled shares of this no-moat homebuilder close to our fair-value estimate.
Given the strong performance reported by homebuilding peers for quarters ended in May and June, we expected Toll Brothers (TOL) to report a nice third quarter. The no-moat homebuilder delivered, easing any concerns of a softening luxury home market. Sales grew 24% year over year as total home deliveries increased 6%, with an average selling price 16% higher than the year-ago quarter. Rising home prices outpaced increases in input costs, and Toll Brothers achieved GAAP gross margin expansion during the quarter, a feat that eluded many of the previously reporting homebuilders. Toll expanded gross margins 210 basis points year over year to 21.9%. We are maintaining our $33 fair value estimate as we have not made material adjustments to our fiscal 2016 and longer-term assumptions. Toll Brothers’ results coupled with excellent new-home sales figures have propelled the stock up nearly 9% since the Aug. 23 release, nearing our fair value estimate.
Toll Brothers’ mounting backlog positions the company for growth in the back half of fiscal 2016 and into 2017. The value of new contracts signed during the third quarter and the ending backlog value increased 18% and 19%, respectively, as all regions and the City Living portfolio contributed. The company continued to invest in new land, spending $459 million for 3,494 lots during the quarter. Total owned and optioned lot count increased 7% year over year and sequentially to 48,697 lots. We liked that the company was able to increase its capital-friendly optioned lot count to 13,103 from 9,662 in the year-ago quarter.
Toll Brothers continued to use its share-repurchase program during the quarter, buying 3.7 million shares at an average price of $26.33 per share, or about 1.1 times the current diluted book value per share, well below our fair value estimate. We like the company’s balanced capital-allocation strategy of opportunistically purchasing land for future growth and repurchasing undervalued shares.
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Brian Bernard does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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