Company Reports

We’ve raised our fair value estimate for Toll Brothers by 12% to $120 per share following the firm’s fiscal third-quarter earnings release. Strong year-to-date financial performance caused upward revisions to our fiscal 2024-25 revenue and profit-margin expectations. However, we have also become more confident in management’s ability to operate with leaner selling, general, and administrative expense spending and a more capital efficient land acquisition and production strategy.

Toll Brothers prides itself on controlling an ample supply of some of the best land in the industry. Premier land inventory, combined with luxurious, customizable designs, allows the company to charge industry-leading average selling prices (among public peers).

Luxury-focused homebuilder Toll Brothers reported strong fiscal second-quarter results (ended April 30). Total revenue and earnings were both above management’s guidance and FactSet consensus estimates. In our view, Toll’s second-quarter financial performance shows that its more-affluent prospective homebuyer base remains resilient even with the 30-year average fixed mortgage rate exceeding 7%. Furthermore, the no-moat-rated homebuilder’s strategic shift to offering more affordable price points and building more speculative homes has supported strong new order growth. Toll’s “affordable luxury” products have allowed it to better tap into the first-time buyer base, and its spec strategy (sometimes called quick move-in homes) allows the builder to better capitalize on the limited supply of existing for-sale homes.

Toll Brothers prides itself on controlling an ample supply of some of the best land in the industry. Premier land inventory, combined with luxurious, customizable designs, allows the company to charge industry-leading average selling prices (among public peers).

New single-family home sales increased 4% in 2023 to 666,000 units, as homebuilders capitalized on a dearth of existing for-sale inventory while also offering more sales incentives, cutting base home prices, and building smaller homes to improve affordability. By the fourth quarter of 2023, homebuilders began to pull back on sales incentives as the average 30-year fixed mortgage rate retreated from 7.62% in October 2023 to 6.64% in January 2024. However, mortgage rates have trended higher recently, and we now forecast the average 30-year fixed rate will be 6.50% in 2024, up from our previous forecast of 6.10%. Even so, that’s lower than the 2023 average of 6.81%, and we think homebuilders won’t hesitate to increase sales incentives if needed; they still enjoyed above-average gross profit margins last year with elevated incentives. As such, in 2024, we think new-home sales will increase 9% to 730,000 units and single-family housing starts will increase 4% to 985,000 units. However, we expect total housing starts will decline roughly 5% to 1,345,000 units due to a 23% decline in multifamily starts to 360,000 units, as there’s currently approximately 1,000,000 multifamily units under construction—the largest backlog in at least 50 years.

Financial results for no-moat Toll Brothers' fiscal first quarter, ended Jan. 31, were reflective of a solid demand environment for new homes heading into the important spring selling season for homebuilders, which is generally viewed as mid-January to mid-April. Homeownership affordability remains challenging for many prospective buyers, but Toll Brothers serves more-affluent customers who have strong balance sheets and are therefore less affected by higher interest rates. Indeed, according to management, approximately 25% of Toll Brothers' customers paid all cash during the first quarter, and the average down payment (as a percentage of home price) for customers needing a mortgage was approximately 33%, well above the national average, which was 13% in 2022, according to the National Association of Realtors.

Toll Brothers prides itself on controlling an ample supply of some of the best land in the industry. Premier land inventory, combined with luxurious, customizable designs, allows the company to charge industry-leading average selling prices (among public peers).

New-home sales have rebounded since the spring of this year as sales incentives and price reductions have attracted buyers who have fewer options in the supply-constrained existing-home market. That said, homebuilder sentiment data tells us that smaller builders remain cautious. Even so, we forecast single-family starts to increase by 3% in 2024, to 0.92 million units. However, we project this increase in single-family starts will be more than offset by a 24% decline in multifamily starts, to 0.36 million units. Multifamily construction has been robust for the past three years, but a record construction backlog and higher construction and financing costs have tamed developers' appetite for new multifamily projects.

Homeownership affordability challenges mounted in 2023 as the average 30-year fixed mortgage rate soared to nearly 8% (from a low of 6.09% in early February). Nevertheless, Toll Brothers delivered good financial performance in fiscal 2023 (ended Oct. 31). While full-year home deliveries declined nearly 9% year over year (to 9,597), revenue only declined 3% (to $10 billion), home sales gross margin (including inventory charges and interest) expanded 140 basis points to 26.9%, and operating cash flow increased over 30% to approximately $1.3 billion. One reason for Toll’s success this year is its more affluent customer base that can afford higher-price homes and generally make larger down payments. But Toll has also adjusted its strategy to serve less affluent buyers (with its “affordable luxury” homes) and better compete with the resale market by building more spec homes.

Toll Brothers prides itself on controlling an ample supply of some of the best land in the industry. Premier land inventory, combined with luxurious, customizable designs, allows the company to charge industry-leading average selling prices (among public peers).

New-home sales have remained resilient despite worsening housing affordability in recent months amid rising mortgage rates, with little relief in home prices in most markets. Year-to-date new-home sales through July were about even with the year-ago period, compared with a 22% decline in existing-home sales. The key to homebuilders’ relative success this year has been their ability to improve affordability by offering sales incentives, lowering base prices, and building smaller homes. According to the National Association of Home Builders, the share of builders offering incentives was 55% in August, up from 52% in July but down from 62% last year. One fourth of homebuilders reported lowering base prices by 6% on average. Homebuilders have also boosted production of speculative homes to capitalize on the tight supply of existing for-sale homes. Spec building also helps builders better manage construction cycle times and costs.

Higher mortgage rates have been a double-edged sword for homebuilders. On the one hand, homebuilders have had less competition from the resale market due to the so-called rate lock-in effect. That is, about 84% of mortgaged homes have a rate below 5%, which has discouraged sales listings of existing homes. On the other hand, housing affordability has worsened as the average 30-year fixed mortgage rate has trended higher over the last four months, exceeding 7% by mid-August.

Toll Brothers prides itself on controlling an ample supply of some of the best land in the industry. Premier land inventory, combined with luxurious, customizable designs, allows the company to charge industry-leading average selling prices (among public peers).

Through the first four months of 2023 (typically viewed as the “spring selling season” for homebuilders) new home sales significantly outperformed existing home sales. Indeed, April year-to-date new home sales declined roughly 10% year over year compared to over a 26% decline for existing home sales. New home sales improved sequentially during the first four months of the year, and April sales increased 11% year over year, albeit on an easy prior-year comparison (April 2022 new sales were down 24% year over year).

Despite the U.S. housing market slowdown, Toll Brothers reported good fiscal second-quarter results (ended April 30), with key performance metrics all exceeding management’s guidance. Toll Brothers delivered 2,492 homes during the quarter, which came in well above midpoint guidance of 2,100 deliveries. This outperformance was due to reduced construction cycle times (that is, how long it takes to build a home) and management’s strategy to build more speculative homes (that is, starting construction without a sales contract in hand). Because approximately 90% of outstanding mortgages have a rate under 5%, many existing homeowners have been reluctant to sell their homes (known as the “rate lock-in effect”), and the supply of existing for-sale homes remains low. Yet, home demand appears to have been surprisingly solid during the spring selling season despite elevated mortgage rates. As such, more would-be buyers have turned to new construction. Approximately 40% of Toll Brothers’ new orders during the quarter were for spec homes, and management is comfortable with this sales mix going forward to capitalize on the limited supply of existing homes for sale.

Toll Brothers prides itself on controlling an ample supply of some of the best land in the industry. Premier land inventory, combined with luxurious, customizable designs, allows the company to charge industry-leading average selling prices (among public peers).

U.S. home sales slowed significantly in 2022 as rising mortgage rates and elevated home prices made homeownership less affordable for more Americans. By mid-2022, the average 30-year fixed mortgage rate had increased roughly 300 basis points year over year to over 6%. According to estimates from the National Association of Home Builders, this rate increase priced out more than 16 million households. We also think higher rates and general economic uncertainty caused some qualified prospective buyers to move to the sidelines. All told, 2022 new- and existing-home sales declined 17% and 18% year over year, respectively.

Toll Brothers’ stock traded higher on Feb. 22 after the no-moat-rated luxury homebuilder reported fiscal first-quarter results (ended Jan. 31) that mostly exceeded guidance and management issued cautiously optimistic commentary on the state of the United States housing market. We've increased our fair value estimate approximately 5% to $69 per share due to the time value of money and our revised near-term inventory turnover outlook.

Toll Brothers prides itself on controlling an ample supply of some of the best land in the industry. Premier land inventory, combined with luxurious, customizable designs, allows the company to charge industry-leading average selling prices (among public peers).

Toll Brothers prides itself on controlling an ample supply of some of the best land in the industry. Premier land inventory, combined with luxurious, customizable designs, allows the company to charge industry-leading average selling prices (among public peers).