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Toll Brothers Stock Pick

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

  1. 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.
  2. 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.
  3. No debt - Toll Brothers has no long-term debt. I believe that this will help them hold a relatively high growth rate.
  4. 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

  1. 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.
  2. 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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Discuss It!

ellen nevins said:

I own a Toll Brothers house, and would not recommend one to anyone, nor would many other people who own them. I have a video made by digusted Toll homeowners that is yours for the asking. See for yourself how the people who own Toll homes feel about Toll "quality" and customer service.

192.168.1.1|192.168.1.1|192.168.1.1|192.168.1.1 said:

good, the content is simple, easy to understand

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This prevents the stock from really being able to appreciate greatly. I doubt the stock will pass 15x earnings.

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