History Hints at a Rebound for Toll Brothers After Earnings

Key Points

• Toll Brothers stock is down after earnings, continuing a trend that’s been in place since late November.
• Luxury homebuilders have favorable trends, but the stock is experiencing seasonal weakness.
• For long-term investors, this is a buyable dip in TOL stock.

Shares of Toll Brothers Inc. NYSE: TOL are down more than 5.5% the day after the company delivered its fourth quarter and full-year 2024 earnings report. This was a strong report by nearly every measure. However, the company is entering into what is typically its lightest quarter in terms of revenue.  

If the past is any guide, the company’s stock may trade sideways for a few months. Still, history also suggests that patient investors might view this as a good opportunity to buy the dip.

A Solid Beat and Raise Quarter 

The headline numbers for Toll Brothers were very strong. Revenue of $3.33 billion was higher than analysts’ estimates for $3.17 billion and over 10% higher year-over-year (YoY). Adjusted earnings per share (EPS) of $4.63 were more than 6% higher than analysts’ projections for $4.34 and were 12.6% higher YoY. The company’s operating margin of 18.3% was in line YoY.  

The Trends Favor Luxury Homebuilders 

For many, homeownership is a primal desire. Millennials are the most likely to purchase their first home. This generation has participated in one of the hottest stock markets in recent memory over the last 10 years. In addition to building their own wealth, this generation is the beneficiary of one of the greatest wealth transfers in recent memory: aging boomers transferring some of their amassed wealth to their adult children. 

There’s more to this luxury home builder's growth story. Many homebuyers are looking for move-in-ready new constructions when the buy-new premium has dropped from its historical average of around 17% to around 3%.  

All of these trends are backed by the Federal Reserve’s pivot to lower interest rates, which helps homebuilders. That’s particularly helpful for a luxury homebuilder like Toll Brothers, which is actively seeking to increase its inventory.  

Keep Your Eyes on the Bond Market 

Much has been made about the impact of rising mortgage rates on the housing market. There is no question that this impacts existing homeowners who may be reluctant to part with a mortgage they obtained at 2% or 3%. 

However, as investors have seen in the last month, the bond market may drive an investment in TOL stock. The stock moved higher after the election, but the move lower started in the last week of November. That corresponded with falling bond prices, which caused mortgage rates to rise.  

However, that’s not having as much impact on Toll Brothers, which has a more affluent customer base that’s more likely to pay for their homes with cash. Toll Brothers delivered 11,400 homes to buyers with incomes over $200,000 in 2024. That’s approximately 2% of the company's estimated addressable market of 575,000 transactions.  

Trade the Anomaly, Buy the Trend 

For a homebuilder’s stock, TOL stock has shown explosive growth in the last 12 months, up approximately 58%. That’s far stronger than many construction stocks, as well as any results the company has delivered over longer periods of time. It supports how strange the real estate market has been in the last five years.  

But investing in the anomaly can be precarious. In this case, let the trend be your guide. Just as the first quarter of a new fiscal year is the lightest in revenue for Toll Brothers, it’s historically been supported by choppy price action in TOL stock. 

That wasn’t the case in 2024, but investors seem to correct that anomaly post-earnings. TOL stock is trading near its consensus price target of $150.33 and could have further to drop. Since the earnings report, MarketBeat shows that Keefe, Bruyette & Woods downgraded the stock from Outperform to Market Perform and lowered its price target from $168 to $164.  

Another trend that favors a long-term investment is the company’s commitment to shareholder value. Since 2016, the company has bought back approximately 50% of its shares. It has also paid a growing dividend with an annualized three-year growth rate of over 23%.