Toll Brothers: Expect a Recovery in the Long Run

Toll Brothers (TOL) is seeing some weakness in its financial performance despite the recovery in the housing market. For instance, in the third quarter that ended on July 31, 2015, Toll’s total revenue was $1.03 billion, down 3% from the year-ago quarter. In addition, the homebuilder posted third-quarter net income of $66.7 million as against prior-year net income of $97.7 million.

Toll Brothers reported a decline in both its top line and bottom line for the quarter primarily due to currency headwinds, which was somewhat offset by the slow but steady global housing market recovery.
However, if we look beyond this weak performance, Toll Brothers’ recovery cannot be ruled out. Let’s see why.

Expect a recovery

Toll has a product diversification strategy that has allowed it to improve its portfolio. In 2000, 91% of its homes were offered for single family, but this share has declined to 68%, with the rest of its home offerings well-distributed across multi-family, by age group and city living.

In addition, Toll has also increased its land lots, which will allow the company to build more homes going forward. The company ended fiscal year 2015’s third quarter with nearly 45,400 lots owned and optioned as against 45,000 during the previous quarter and 49,000 last year. By the end of the third quarter of 2015, nearly 35,700 of these lots were owned, and comprised of about 16,000 lots that include lots in backlog.

The homebuilding major is will strategically implement a product diversification strategy by capturing the homebuilding market for multi-family, age category, and according to the city living customer segments. This market acquisition strategy will expand the company’s top line growth and deliver improved shareholder returns. In addition, Toll is focused on developing a strong land position with approximately 16,000 finished lots captured as of July 31, 2015.

Toll is highly focused on expanding its market presence by developing new communities for varied age groups and different income level customers including the luxury seekers. This expansion strategy is forecasted to deliver excellent shareholder returns over a long-term.


I think that investors should definitely consider an investment in Toll Brothers as its valuation is attractive. The company has a trailing P/E ratio of 19.50 and a trailing P/E ratio of 13.62. The company’s forward P/E ratio is lower than the industry’s average P/E of 17.02. The PEG ratio of 0.96 is also an indicator of undervaluation. However, Toll needs to optimize its balance sheet as it has a debt of $3.32 billion on the balance sheet as against a smaller total cash position of $404.82 million. But, from an overall perspective, Toll Brothers is definitely a good investment considering the points discussed above.
Published on Sep 20, 2015
By Ayush Singh

Copyrighted 2020. Content published with author's permission.

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