Toll Brothers updated May 23

Toll Brothers is updated and now rated (lower) Strong Buy at $39.58 (that was a price from earlier today, it closed at $39.91.

For those holding it, the recent price decline is certainly disappointing.

It’s a cyclical industry and so projecting future earnings is always difficult. Having listened to the conference call and gone through the earnings release and crunched the numbers, the stock looks like good value to me. After a number of strong quarters of revenue and earnings growth this latest quarter had strong sales growth but earnings per share growth was more modest or was down slightly depending what adjustments are made to earnings.

My understanding is that revenues should increase substantially in the order of 27% in the next year based on the existing backlog. Earnings growth could be similar but may lag is expenses rise faster than revenue. The company is currently selling homes in about 283 different selling communities. This is down from 316 one year ago presumably because some communities have now been sold out of inventory. The lower community count lower earnings and new sales in Q2. In the last half of 2018 the company intends to open 75 communities for sale and the net community count at the end of 2018 is expected to be about 315.

My sense from management was definitely  that they expect growth to continue.

Yahoo Finance calculates that the shares are trading at just 8.1 times the earnings per share expected in 2019. Perhaps those expectations are exaggerated but certainly 8.1 times forward earnings would seem attractive. I like to focus more on achieved railing earnings and in that basis the stock is trading at about 12 times earnings. This is attractive if those earnings can be expected to grow over the years.