Bear of the Day: Toll Brothers, Inc. (TOL)
Toll Brothers, Inc. TOL is one of the top luxury homebuilders in the country. Toll Brothers has been on an impressive run of revenue growth for the last 10 years, but its outlook is fading as the housing market cools on the back of soaring mortgage rates and economic downturn fears.
TOL shares have tumbled off their December 2021 highs, and its earnings outlook for FY23 has plummeted since Toll Brothers reported its quarterly results on August 23.
Victim of Its Own Success?
Toll Brothers is a diversified luxury housing builder that operates its own architectural, engineering, mortgage, title, and land development subsidiaries, as well as other offerings that fit into its high-end offerings such as golf course development. TOL also operates its own lumber distribution, house component assembly, and manufacturing segments.
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TOL builds in roughly half of U.S. states and in over 60 markets from Arizona and California to New York and North Carolina. Despite being in the luxury market, Toll Brothers caters to nearly every aspect of the industry, including first-time, move-up, empty-nester, active-adult, and second-home buyers. Toll Brothers also operates in the rental market in both urban and suburban areas.
The higher-end homebuilder has posted a rather solid run of sales and earnings expansion during the last roughly 10 years and it befitted from the covid housing boom. But the once-soaring housing market is slowing as mortgage rates jump off historic lows.
Mortgage rates recently climbed above 6% for the first time since 2008, up from 2.9% this time last year. The higher rates make buying homes far more expensive. Plus, the covid and low rate-boosted market saw so many people buy homes so quickly that it was due for a slowdown at some point.
Fresh data out earlier this week showcased that the U.S. housing market slowed for a seventh straight month in August. This marked the longest stretch of declining sales since 2007. The higher rates and economic downturn fears are hitting the luxury housing market particularly hard.
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Bottom Line
Zacks estimates call for Toll Brothers to post another strong year of top and bottom-line expansion, with 10% sales growth expected and 41% higher adjusted earnings. The company’s FY23 sales are projected to dip 9% against these levels, with its earnings expected to slip 11%.
TOL’s downward earnings revisions help it land a Zacks Rank #5 (Strong Sell) right now. And Wall Street doesn’t appear ready to touch home builder stocks until there are some signs of mortgage rates leveling off or coming back down, which won’t happen until the Fed backs off.
Toll Brothers could benefit from long-term demographic trends and the ongoing undersupply of single-family homes. Still, it might be best for investors to stay away from TOL and other home builders for now.
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