Whither the share price of Toll Brothers, the Horsham-based home-building giant that has seen its stock hit a 52-week high recently of just over $39, just before record earnings last week?
We checked in with Toll’s chief financial officer, Marty Connor, to find out why – despite blockbuster earnings and revenues — the share price hasn’t budged since last week’s earnings report.
“We were surprised about the stock price. We’re frustrated,” said Connor. “It’s done well for the last few weeks, but I haven’t been able to get an answer I feel satisfied with as to why” it hasn’t broken out again.
Toll paid its first-ever stock dividend at the end of April, and “our plan is to pay a dividend at that level on a quarterly basis,” he added. There are no plans to raise the dividend.
Home builders historically have been leaders in economic cycles, and interest rates remain relatively low, fueling sales. Finally, millennials have started buying houses.
“This demographic marching army [of millennials] are finally getting to home-buying age. We’re seeing it later than generations before them, but they still desire to raise a family in a suburban home,” he added.
Toll debuted a line of lower-priced homes called T-Select, “in recognition that millennials are marrying at age 32 to 34, forming families, and purchasing homes at a higher level because they’ve been in the workforce 10 years each. Rather than buying a $250,000 house, they buy at $350,000 to $450,000,” he added. Toll will shortly open Twin Lakes in Bucks County, the first T-Select single-family home community in the Philadelphia area, this summer. “The analogy we’ve used is BMW Series 3 Series or Mercedes C Class,” Connor explained.
About 25 percent of Toll’s home sales over the last 18 months were buyers 35 years old or younger.
“We were surprised by that. We’re also seeing a trend whereby house-price appreciation is allowing people to move up and buy a more expensive house,” he said.
Toll Brothers bought back $400 million worth of stock in 2016, carrying about $700 million worth of debt, and “we’re opportunistic on share buybacks. We’re not as programmatic. We are authorized by the board to do what we think is appropriate.”
Could rising rates be worrying investors? The Federal Reserve is set to meet in June to decide whether to raise short-term rates. “We saw interest rates spike up last October, but they’re consistent now with where they were 12 months ago. Right now a 30-year mortgage is at 4 percent,” said Connor, still a historically low rate and a good deal for borrowers.
President Trump has proposed an import tariff on timber from Canada. Could that be a factor?
“On the tariff, we have seen costs increase on Canadian lumber through the course of our fiscal year in anticipation of the increase in tariff, which did in fact occur in late April. Since that time, pricing stabilized and has begun to ease a bit. We have seen the most cost increases in lumber and labor and have been able to maintain gross margins on average through modest price increases particularly in our stronger markets,” Connor said.
Toll Brothers hasn’t heard from any disappointed shareholders, so “we’re mystified” as to why the stock price hasn’t moved.
Fundamentally, the numbers look strong: New-owner households are double the number of new-renter households in the first quarter of this year. It’s the first time in a decade that new buyers have exceeded new renters, according to Trulia,
Toll’s profit and revenue beat analysts’ estimates and raised its sales forecast for fiscal 2017. Orders, a key metric for home builders, rose 26 percent to 2,511 homes in the second quarter.
“This was the best spring selling season we have had in over 10 years,” chief executive Douglas Yearley said.
Other large U.S. home builders D.R. Horton and rival PulteGroup also reported quarterly profits in April that topped estimates.
Toll, which has been building luxury homes for half a century, expects to sell between 6,950 and 7,450 homes in fiscal 2017, up from its previous forecast of 6,700 to 7,500 homes. Toll raised its full-year revenue forecast range to $5.4 billion to $6.1 billion, from $5.2 billion to $6.2 billion. Toll also reaffirmed its 2017 adjusted gross margin forecast at 24.8 percent to 25.3 percent. Toll’s average price of homes sold decreased to $832,400 from $855,500 a year earlier, partly as it rolled out its T-Select line.
Toll’s net income rose to $124.6 million, or 73 cents a share, in the quarter from $89.1 million, or 51 cents per share, a year earlier. Revenue rose 22.2 percent to $1.36 billion. Shares of Toll have risen roughly 21 percent this year, while the Dow Jones U.S. home construction index increased 23 percent.
But the share price? Zaks Research called Toll Brothers’ valuation “a little stretched when compared to the industry average. Looking at the company’s price-to-earnings ratio, the company currently has a trailing 12-month P/E ratio of 17, compared to its peer building residential/commercial industry’s average over the past five years of 13.95.”
Significantly, investors may be missing the longer-term signal: Toll Brothers represents an important bellwether – that of America’s migration south and west. Almost half of Toll’s business is now west of the Mississippi River, including acquisitions in Boise, Idaho; Seattle; and California.
“That marketplace is doing very well, as it’s where job growth and population growth are both happening,” Connor noted. “While certain markets in the Northeast are doing well, it isn’t the hotbed for job growth.”