Here's Why You Should Hold Toll Brothers (TOL) Stock Now

Strong housing demand and lack of competition in the luxury new home market have worked in favor of Toll Brothers Inc. (NYSE:TOL) . Though shares of the company have returned 16.7% in the past year, little less than the industry's gain of 19.1%, upward estimates revisions raise optimism. Estimates for the current and the next year have moved upward by 8.3% and 9.6%, respectively, over the last 60 days.

With a market capitalization of approximately $6.6 billion, the stock has met earnings expectations in three of the past four quarters with an average positive surprise of 15.2%. However, rising building materials and labor costs act as a margin constraint. This mixed sentiments justify the stock’s Zacks Rank #3 (Hold).

Here we take a detailed look at the company’s performance and operations to analyze why investors should hold on to this stock.

What’s Acting in Favor of Toll Brothers?

Less competition in the luxury new home market is beneficial for Toll Brothers. The company mostly caters to luxury move up buyers, who possess a residence and are planning to shift to larger homes. These homebuyers are less sensitive to price changes. Thus, the company enjoys an edge over other homebuilding companies, resulting in increased home deliveries, earnings and revenue backlog growth. The first quarter of fiscal 2018 marked the 14th consecutive period of year-over-year growth in contract dollars and units with 20% or more growth in the last few quarters. Toll Brothers achieved double-digit growth in earnings, revenues, contracts and backlog in fiscal 2017.

Moreover, given the pent-up housing demand, the company secured some of the most sought-after urban locations in the country, where land is scarce and approvals are not easy to obtain. The company’s solid land position places it well to cater to growing demand in these regions, providing it a competitive edge over its peers who are facing land availability constraints. In the first quarter of fiscal 2018, the company spent $327 million to acquire land.

Also, overall fundamentals of the housing market were strong in 2017 and are expected to improve in 2018. Steady job and wage growth, a recovering economy, moderating home price gains, rising rentals, rapidly increasing household formation and a limited supply of inventory — all point to consistent strong demand in 2018.

Drawbacks

A shortage of buildable lots and skilled labor is exerting pressure on the margins of Toll Brothers and other homebuilders. In fact, the company’s adjusted gross margin declined 80 basis points in fiscal 2017.

Moreover, the recently imposed tariff on imported steel and aluminum raises concern. An increase in import tariff will escalate raw material cost for home builders, who are already grappling with increased cost, thanks to the recent imposition of lumber tariff.

Toll Brothers Inc. Price

Stocks to Consider

You can consider a few better-ranked stocks in the same space.

KB Home (NYSE:KBH) , a Zack Rank #1 (Strong Buy) stock, surpassed earnings in all of the four quarter with a positive earnings surprise of 19.5%. You can see the complete list of today’s Zacks #1 Rank stocks here.

M.D.C. Holdings, Inc. (NYSE:MDC) holds a Zack Rank #2 (Buy). Its earnings are expected to grow 15.5% in 2018.

Lyon William Homes (NYSE:WLH) carries Zacks Rank #2. Its earnings are expected to grow 38.1% this year.

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