Chase the Rebound in Toll Brothers (TOL) Stock?

As a leading luxury homebuilder, Toll Brothers TOL stock has seen a sharp rebound with the company benefiting from a more affluent customer base that’s less sensitive to interest rates.  

Attributed to continued momentum in the luxury housing market, Toll Brothers was able to post strong results for its fiscal third quarter on Tuesday, and investors may be wondering if it's time to get in on the rebound in TOL shares.

To that point, Toll Brothers' stock is up more than +10% in August and has now spiked over +25% in the last three months, but is still 23% from its 52-week high of $169 a share.  

Toll Brothers Strong Q3 Results

Delivering record Q3 sales of $2.94 billion, Toll Brothers exceeded estimates of $2.85 billion with its top line expanding 8% from $2.72 billion a year ago. On the bottom line, Q3 earnings of $3.73 per share were up from EPS of $3.60 in the comparative quarter and beat expectations of $3.59 a share by nearly 4%.

Despite sales volumes being impacted by an overall softer housing market, Toll Brothers attributed its strong Q3 results to its balanced operating model, having a broadly diversified luxury business and a strategy of prioritizing price and margin over pace.

Notably, Toll Brothers delivered 2,959 homes during Q3 at an average price of $974,000 with an adjusted gross margin of 27.5%. Additionally, Toll Brothers highlighted that it returned approximately $226 million to shareholders during the quarter through dividends and share repurchases.

Toll Brothers Backlog & Full-Year Guidance

Signing 2,388 net contracts worth $2.4 billion during Q3, Toll Brothers has a total backlog of 5,492 homes valued at $6.37 billion with an average sales price of $1.16 million. However, these total backlog units and value declined 19% and 10% year over year, respectively. Toll Brothers now expects deliveries to be approximately 11,200 homes for the full year, which was at the lower end of its previous guidance range.

That said, Toll Brothers maintained all other key guidance metrics, including a full-year adjusted gross margin forecast of 27.25% and other income/income from unconsolidated entities and land sales gross profit expectations of $110 million.

Toll Brothers' Attractive Valuation

Magnifying Toll Brothers' probability is that TOL shares trade at just 9.4X forward earnings and are still at a pleasant discount to its Zacks Building Products-Home Builders Industry average of 12.4X, which includes other prominent companies such as Lennar Corporation LEN and D.R. Horton DHI. Plus, TOL trades well under the preferred level of less than 2X sales.

Toll Brothers' Intriguing Dividend

Piggybacking on Toll Brothers' capital distribution to shareholders, the company has increased its dividend for five consecutive years with an annualized growth rate of 16.31%.

While Toll Brothers' 0.76% annual yield is still below the S&P 500’s average of 1.16%, its 7% payout ratio indicates there is plenty of room to raise its dividend in the future and many of its industry peers don’t offer this type of return.

Bottom Line

Toll Brothers does appear to be well-suited to weather the slowdown in the housing market, thanks to its luxury clients, but the company isn’t immune to what has been a tougher operating environment. For now, Toll Brothers stock lands a Zacks Rank #3 (Hold) and certainly offers long-term value at current levels, although there could still be better buying opportunities ahead after such a sharp rebound in the last three months.

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This article originally published on Zacks Investment Research (zacks.com).

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