Toll Brothers (NYSE: TOL) Looks Primed to Set 52-Week Highs

After shares plummeted from pre-pandemic highs of around $48 in February to lows of around $13 in March, Toll Brothers NYSE: TOL has come roaring back, and currently sits less than six points away from 52-week highs.

There was reason to believe that the homebuilders would struggle during the pandemic, with the builder confidence index dropping all the way to 30 in April. But in August, just four months later, the index came in at 78, tied for the highest number in its 35-year history.

Several home builders are benefiting from macro-trends, and Toll Brothers is positioned to benefit as much as any other.

Record Signings in Q3

Toll Brothers’ revenue actually decreased 7.4% yoy in Q3. But for the quarter, it recorded net signed contracts of 2,833 homes and $2.2 billion, up 26% and 18% respectively. May was the worst month, with a 21% yoy decrease in signed contracts. June was up 76% yoy and July was up 31% yoy. Furthermore, at the time of the earnings call, TOL management noted that August had thus far been a strong month.

Average selling prices (ASPs) were, however, down from $881,000 in Q3 2019 to $805,000. Toll Brothers made a higher percentage of its sales in the affordable luxury segment ($300,000 to $600,000).

That said, Toll Brothers luxury segment ($600,000 to $3 million) looks like it will recover.

Mortgage Rates & Customer Profiles are Favorable

Mortgage rates are at historic lows, which makes luxury homes more affordable. On the Q3 earnings call, CEO Douglas C. Yearley said, “Historically low-interest rates are an undeniable benefit to buyers across all segments of the market. 30-year mortgage rates at or below 3% are fueling tremendous affordability. For example, with a 3% versus 4% mortgage rate, a person can afford a $900,000 home versus an $800,000 home with the same monthly payment.”

Furthermore, Toll Brothers’ target-market, college-educated professionals, has fared better than most since the onset of the pandemic. Yearley noted, “The unemployment rate for college graduates is lower than that of the population in general. Their job prospects appear to be holding up well, which gives them the confidence to buy a new home. In addition, they are more likely to have accumulated well from the strong stock market.”

And these college-educated professionals are increasingly moving from the cities to the suburbs, trading in their apartments for homes. Yearly noted a “significant increase in relocation traffic to our communities in Boise, Salt Lake City, Las Vegas, and Reno, Metro Phoenix, Denver, Austin, and of course, Florida.” Many of those places are not major job hubs, showing that people are moving to new places to work remotely.

TOL is Benefiting from Build-to-Order Trend

Homebuyers are increasingly asking for customizable homes since they are spending more time than ever at home.

Toll Brothers offers its buyers the ability to add things like high-tech home offices, multi-generational suites, and open floor plans.

The numbers show that Toll Brothers’ customers are taking advantage of these options, as in Q3, the company’s average buyer added “$181,000 or 23% in upgrades to the base price of their homes.”

The Price is Right on Toll Brothers

Toll Brothers is trading at 13.8x forward earnings. The outlook is even better the year after, as TOL is trading at 10.1x its projected earnings a year out.

The dividend yield is nothing special at a shade over 1%, but it’s gravy on a company with a very appealing valuation.

Look for a Breakout

After a small pullback in late-August into early-September, TOL is up nearly 5% over the first two trading sessions of the shortened week. Ideally, shares would move into the $48-49 range, consolidate for a week or so, and then convincingly breakout above $49.50 a share.

Around a month ago, the 50-day moving average crossed over the 200-day moving average, a sign of an emerging uptrend.

The Final Word

TOL shares aren’t going to make you rich, but the very reasonable valuation gives investment in Toll Brothers a high floor.

The ceiling isn’t extremely high, but industry-wide and company-specific tailwinds give Toll Brothers solid growth potential.

Keep an eye on TOL and look to get in if the chart shapes up.