hikesterson Synopsis Toll Brothers ( NYSE: TOL ) designs, constructs, and sells luxury residential homes. TOL’s historical financial results have demonstrated robust home sales revenue growth. Additionally, its adjusted home sales gross margin and net income margin have consistently expanded as well.
In 2Q24, revenue continued to grow while margins remained robust year-over-year. US households have been consistently growing since 1945. TOL’s addressable market’s growth, which is households with incomes of more than $200,000, has been outpacing all households’ growth.
Combining this with its current low penetration rate in its addressable market, it means that there are still plenty of opportunities for TOL to capture market share and grow. Additionally, the demand for luxury homes is driven mainly by changes in wealth and an increase in net worth, rather than a change in the mortgage rate. Therefore, the demand for luxury homes is significantly less sensitive to mortgage rate changes.
Overall, I am recommending a buy rating for TOL. Historical Financial Analysis Author's Chart For context, TOL’s total revenue is segmented into home sales revenue and land sales and other revenue. For home sales revenue, it has shown consistent growth over the past three years.
In 2022 , home sales revenue increased to approximately $9.711 billion. This growth was primarily driven by an increase in the number of homes delivered, as well as an increase in the average price of the homes delivered.
They increased 5% and 9% year-over-year, respectively. In 2023 , home sales revenue increased to approximately $9.866 billion.
This growth was driven by an increase in the average price of the homes delivered. The average price increased by 11%. However, home sales revenue growth was partially offset by a decline in the number of homes delivered.
The number of homes delivered in 2023 fell by 9%. The reason behind the volume decrease was due to a lower backlog in 2022. Author's Chart Moving down its P&L, let's take a look at TOL’s adjusted home sales gross margin performance over the last three years.
The adjusted home sales gross margin is a useful financial metric as it allows us to assess and evaluate the performance of TOL’s home building operations. Looking at the chart, its adjusted home sales gross margin has been consistently expanding annually. In 2021, it was approximately 25%.
It increased to 27.5% in 2022. In 2023, it further increased to 28.
7%. The expansion in TOL’s adjusted home sales gross margin in 2023 was attributed to its decision to refrain from aggressively pursuing sales at the expense of margin during periods of unfavorable market conditions. In addition, its net income margin over the same time frame has shown consistent expansion as a result of the gross margin expansion.
In 2021, the reported net income margin was 9.9%. It increased to 13.
2% in 2022. In 2023, its net income margin further increased to 13.9%.
Second Quarter 2024 Earnings Analysis For 2Q24 , TOL reported revenue of $2.84 billion, which represents year-over-year growth of approximately 13.18%.
Total revenue is made up of home sales revenue and land sales and other revenue, accounting for $2.65 billion and $190.5 million, respectively.
For the quarter, home sales revenues were up approximately 6.30% year-over-year. This growth was attributed to an increase in the number of homes delivered, which increased by 6%.
Homes delivered increased because of more deliveries of spec homes and a higher backlog conversion. TOL is able to deliver more because of improvements in build times. On the other hand, the increase in land sales and other revenues was driven by the sale of a land parcel to a commercial developer.
In 2Q24, the value of net signed contracts was $2.94 billion, which represents a 29% increase year-over-year. On the other hand, the value of backlog decreased by 12% year-over-year to $7.
38 billion. Author's Chart Regarding TOL’s 2Q24 profitability margins, both adjusted home sales gross margin and adjusted net income margin performed well year-over-year as they remained robust. TOLs’ 2Q24 adjusted home sales gross margin, which does not include inventory write-downs and interest, was 28.
2%, pretty much in line with the previous period’s figure of 28.3%. For context, TOL’s 2Q24 adjusted home sales gross margin was 0.
60% higher than its previous guidance. The outperformance was attributed to effective cost control, a favorable mix, and increased leverage from higher-than-projected revenues. As a result of the robust adjusted gross margin, TOL’s 2Q24 adjusted net income margin also remained robust.
2Q24’s adjusted net income margin reported was 12.6% vs. the previous period’s 12.
8%. TOL’s adjusted diluted EPS grew from $2.85 to $3.
38, representing a year-over-year increase of 18.59%. Public Homebuilders’ Market Share Investor Relations TOL is an award-winning, nationally recognized brand.
Over the last 18 years, public homebuilders’ market share has been consistently increasing, meaning public homebuilders are taking share from private builders. In 2005, public homebuilders’ market share was approximately 24.9%.
In 2023, public homebuilders’ market share increased significantly to approximately 51.1%, overtaking private builders’ dominance. There are a number of advantages that public homebuilders have over private builders.
Public homebuilders generally have stronger finances compared to private builders because they have better access to capital. In addition to capital, public homebuilders also have better access to labor because they are able to provide consistent work, which means consistent income and stability. Typically, public homebuilders have much higher bargaining power when negotiating with suppliers because of the volume they are able to bring in.
Fast Growing Addressable Market FRED According to Federal Reserve Economic Data [ FRED ], there were approximately 131.4 million households in the US. Out of these 131.
4 million households, TOL’s total addressable market [TAM], defined as households that generate more than $200,000 of income, is approximately 16 million households. The reason behind this target audience is because TOL specializes in and focuses on building and selling luxury homes. Investor Relations Looking at the following households’ growth chart, it shows that households with incomes above $200,000 are outgrowing all households’ growth.
For households with income above $200,000, the compound annual growth [CAGR] between 2012 and 2022 was 68%, 9.7x larger than all households’ 7% CAGR. Investor Relations Currently, TOL’s annual home sales are approximately 10,000 units, which implies that TOL only reaches about 0.
06% of its TAM annually. Therefore, looking ahead, there is still a lot of space and opportunities for TOL to capture more market share and further increase its market leadership. Additionally, the fast-growing high-income households will also provide tailwinds for the luxury home market and bolster TOL’s outlook.
Looking at the following price chart, the average delivered price of the top five public homebuilders, ranked based on most recent fiscal year revenue, is nowhere near TOL’s average delivered price of $1.028 million. The luxury home building industry that TOL operates in has much lesser competition.
TOL’s main competitors are small private builders, not the larger public homebuilders, as most of these larger public homebuilders focus on lower-priced homes. Therefore, I believe this less competitive landscape will allow TOL to gain market share and increase market leadership with less resistance. Investor Relations Demand for Luxury Homes Redfin Despite the high mortgage rate, putting pressure on demand for new single-family homes in the US, sales of luxury homes, on the other hand, increased.
For comparison, sales of non-luxury homes fell 4.2%, while sales of luxury homes rose by more than 2%. Additionally, the median luxury home price reached a record of $1.
225 million. According to JPMorgan , their analysis concluded that the main driver of luxury housing demand is related to changes in wealth and an increase in net worth rather than a change in the mortgage rate. Luxury housing demand is significantly less sensitive to mortgage rate changes compared to non-luxury housing demand.
Looking at the following distribution of household wealth chart , the wealth in every percentile group has been consistently growing. US wealth has been consistently increasing since 2009. Federal Reserve Relative Valuation Model Author's Relative Valuation Model According to Seeking Alpha, TOL operates in the homebuilding industry.
In my relative valuation model, I will be comparing TOL to companies that operate in the homebuilding industry in terms of growth outlook and profitability margins trailing twelve months [TTM]. For growth outlook, I will be comparing their forward revenue growth rate. This metric is forward-looking and will give us insight into their growth projections for the next 2 years.
For profitability margin TTM, I will be comparing their EBITDA margin TTM and net income margin TTM. These two metrics will give us a deeper look and understanding of their core business activities’ performance and how they stack against one another. Starting with the growth outlook, TOL is performing in line with the industrial peers’ median.
TOL has a forward revenue growth rate of 1.73%, closely in line with peers’ median of 1.72%.
However, when it comes to profitability margins TTM, this is where TOL shines, as it outperformed peers’ median in both EBITDA margin TTM and net income margin TTM. For EBITDA margin TTM, TOL reported 20.38%, which outperformed peers’ median of 16%.
For net income margin TTM, TOL reported 15.07%, which also outperformed peers’ median of 12.54%.
Currently, TOL’s forward non-GAAP P/E is 9.32x, modestly below peers’ median 9.71x.
Given TOL’s in-line growth outlook and outperformance in profitability margins TTM, I argue that TOL’s P/E should be at least trading at peers’ median. Therefore, I will be adjusting my 2025 target P/E for TOL upward to peers’ median P/E. At this P/E, I considered it to be conservative because of TOL’s better performance.
For 2024, the market revenue estimate for TOL is approximately $10.42 billion, while EPS is $14.09.
For 2025, the revenue estimate is approximately $10.87 billion, while EPS is $14.14.
When analyzing TOL’s most recent 2Q24 earnings results, TOL did provide guidance for the full year 2024. Starting with deliveries, TOL forecasts it to be between 10,400 and 10,800 units. At the midpoint, it would be 10,600 units.
For the average delivered price per home, TOL estimates that it would be between $960,000 and $970,000. The midpoint would be $965,000. If we multiply the estimate for deliveries by the average delivered price per home, the implied FY2024 forecasted revenue will be between $9.
98 billion and $10.47 billion. Lastly, for adjusted home sales gross margin, TOL forecasts it to be 28.
0%. Together, I believe TOL’s forecast and my forward-looking analysis as discussed, support and justify the market’s estimate. By applying my 2025 adjusted target P/E for TOL to its 2025 EPS estimate, my 2025 target share price is $137.
30. Risk and Conclusion The risk associated with TOL is regarding its increasing supply of quick move-in homes, also known as spec homes, relative to built-to-order homes. In the event of unfavorable economic conditions, TOL might be forced to cut the prices of such homes rapidly to prevent carrying large amounts of finished inventory.
If prices are cut, it could have adverse impacts on TOL’s financial performance and results. In addition, a substantial part of TOL’s revenue derives from California. In the event that home sales activity or sales prices in California decline, it will have a material impact on TOL’s financial results as well due to a lack of diversification.
In the last three years, TOL’s home sales revenue has been consistently growing. In addition to that, its adjusted home sales gross margin and net income margin have consistently expanded as well. Currently, there are about 16 million households that generate income greater than $200,000.
TOL’s market penetration is considered low, as it only reaches approximately 0.06% of TAM. The cherry on top is that this household group’s CAGR outpaced all households’ CAGR.
Therefore, there is still space and opportunities for TOL to capture market share. The demand for luxury homes is primarily driven by changes in wealth and an increase in net worth rather than a change in the mortgage rate. Therefore, demand for luxury homes is significantly less sensitive to mortgage rate changes.
As a result, the current high mortgage rate environment is most likely going to have a lower impact on luxury homes as compared to non-luxury homes. Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions.
I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Seeking Alpha's Disclosure: Past performance is no guarantee of future results.
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