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Toll Brothers 6/16/2002
LT Buy at $27.95. Price
target: $35.00
By Chris Stallman
| E-mail
What is
the American dream? To have a beautiful spouse, great kids, big
home, nice cars, and a great job? That's what comes to many
peoples mind. And there's one company out there making it a
reality for a lot of people. Well, at least when it comes to a big
home, that is.
Toll Brothers
is a luxury homebuilder based out of Huntington Valley, Pennsylvania.
They build homes in suburban communities in 21 states that cost
an average of $500,000 a piece (but they also build some homes that
are well into the 7 figures). They also own and operate ten communities
for active adults over 55 years old.
The company has sales of $2.3 billion and have been
growing them at 20% annually for the last 5 years. And a beautiful
9.9% profit margin gives them income of $225 million/year or
about $2.27 per share.
The company has sales of $2.3 billion and have been growing
them at 20% annually for the last 5 years. And a beautiful 9.9%
profit margin gives them income of $225 million/year or about $2.27
per share.
What I Like About This Stock
- Consistently
strong earnings - Despite the slowing economic conditions in the
United States, Toll Brothers has managed to keep their earnings
strong. In fact, they've beat estimates for the last five
quarters.
- Improving
margins - The company has been improving their profit margins
to their current levels of 9.9% as opposed to the 6.2%
margin they were experiencing 10 years ago. Their ROE (23.4%)
and ROA (8.4%) have also nearly doubled in the last 10 years.
- No
debt - Toll Brothers has no long-term debt. I believe that this
will help them hold a relatively high growth rate.
- It's
cheap - The company is only trading at 10x FY2002 earnings and
the stock even has an intrinsic value of $104/share. I believe
the company is worth at least 12.3x FY2002 earnings (their PE
ratio), which puts the stock at about $35/share.
What I Don't Like
- Prone
to sustained decreases in economic conditions - Although the company
has done well throughout the economic pullback, I think that a
sustained decline in the economy will eventually take its toll
(no pun intended) on the stock.
- Even
though the company is relatively cheap compared to stocks in the
S&P 500, the whole homebuilding industry is trading at low
valuations. This prevents the stock from really being able to
appreciate greatly. I doubt the stock will pass 15x earnings.
I think Toll Brothers is a very interesting and attractive
stock. For a long-term investor, I think it's a great addition
to your portfolio. And because it's a solid company, I think the
downside is minimal. I expect to see this stock at $35/share within
12 months and $50/share within 2 years. Happy trading.
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