After recovering from a major slump, the US housing market is now back in full swing, evidenced in part by strong macro numbers. The markets have also caught on to this fact, sending homebuilders on a stellar run in recent times. This year alone, homebuilders are up over 16%. One homebuilder in particular has been doing a great job of growing earnings, and is expected to continue outperforming the industry over the next few years. Toll Brothers Inc (NYSE:TOL) recently announced earnings that came in ahead of the consensus, and is still trading at a reasonable valuation.
Stock Overview
Toll Brothers Inc (NYSE:TOL) engages in the design and construction of luxury homes and apartments in the United States. It also operates a number of golf courses connected to planned communities. The stock has a market cap of $5.80 billion and is up over 25% in the last twelve months, lagging behind the performance of the homebuilder ETF but outpacing the broader market. Not too volatile, it has a beta of 1.35.
Earnings
Toll Brothers Inc (NYSE:TOL), together with the rest of the industry, was hit hard by the last financial crisis. In 2008, the company posted a loss of $1.88 per share, which widened substantially to a loss of $4.68 in 2009. Since then, things have been looking up. The company really hit it out of the park in the fourth quarter 2012, earning $2.35 per share versus an estimate of $0.23, a beat of over 900%.
While the company missed the consensus in the first quarter of 2013, the second quarter report was a solid beat, with EPS coming in at $0.14 versus an estimated $0.07, and up from $0.10 a year ago. Revenue for the quarter came in $516 million, beating by around $4.94 million for a sizable 38% increase. The news sent the stock up over 5% before the bell.
Not only has the number of homes delivered increased, but so has also the average price, going from $557,000 in the second quarter 2012 to $577,000 for this quarter. According to management, the company has been able to maintain its competitive edge due its strong brand, good land position and its large capital base. With the backlog up 69% in dollars, and a continuously improving picture of consumer confidence and home prices, the company expects this strong performance to continue into fiscal 2014.
Competitors
Other companies in the industry have also been faring well lately. D.R. Horton, Inc. (NYSE:DHI) is one of the largest homebuilders in the US, and had its big beat in the third quarter of 2012 with EPS of $2.22 smoking the $0.20 consensus estimate. Like Toll Brothers Inc (NYSE:TOL), the company has been profiting greatly from the resurgence in homebuilding and rising home prices, which has sent the stock up nearly 60% in the last twelve months, of which 23% this year alone.
The company had another healthy beat in the second quarter of 2013, with net income up a massive 173%. While D.R. Horton, Inc. (NYSE:DHI) may also be a solid choice, analyst are expecting bigger growth from Toll Brothers. The 3-5 year expected growth rate for Toll Brothers is a huge 45.19%, versus D.R. Horton’s 19.5%.
PulteGroup, Inc. (NYSE:PHM), another competitor, has also delivered a string of beats over the last year or so. This is without a doubt the best performing stock of the companies mentioned in this article, with a staggering 161% rise over the last twelve months. This can perhaps be explained by the company’s earnings history.
The firm lost money between 2007 and 2011, although the loss narrowed each year. Finally turning a profit in 2012, the stock is now being picked up big-time by investors. With a beta of 2.29, the stock is a volatile one, and with a total debt to equity ratio of over 114, the company may still be more vulnerable than the competition to a sudden downturn in the housing market, considering its high leverage. Also, the 3-5 year growth rate is currently negative.
Valuations and metrics
Toll Brothers Inc (NYSE:TOL) isn’t too expensive at the moment, trading at 11.88 times trailing earnings. This is higher than D.R. Horton, Inc. (NYSE:DHI)’s 8.35, but lower than PulteGroup, Inc. (NYSE:PHM)’s 27.75. The price to sales of 2.72 is a little high compared to the industry. On the other hand, the gross margin of around 23.3% is way ahead of the competition. The return on equity of 17.21% is decent, and the firm has the lowest total debt to equity ratio of the companies mentioned here.
The bottom line
According Toll Brothers Inc (NYSE:TOL) management, the housing recovery is still in its early stages. Still, earnings growth from companies in the industry is impressive, which may be a sign of more to come. With prices as well as sales on the increase, there is plenty of evidence that strength in the housing market is here to stay. Companies in the industry may as a result be seeing even more upside in the months to come.
The article Continued Strength for Formerly Distressed Homebuilders originally appeared on Fool.com and is written by Daniel James.
Daniel James has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Daniel is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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