Toll Brothers Inc (TOL), Taylor Morrison Home Corp (TMHC): This Home Builder Is a Good Buy

In the recent past, demand for housing has been suddenly gushing in, and home builders are rushing to capitalize on the opportunity. The supplies of existing homes continue to decline and new orders are coming in. After the recession in 2008, the housing industry is witnessing a boom again. I see a great deal of investment opportunities available in the market. And Toll Brothers Inc (NYSE:TOL) is certainly one of the available options.

Financial outlook of the stock

Toll Brothers Inc (NYSE:TOL) is one of the top home builders involved in the business of designing, building and financing for homes in luxury residential communities. Operating in 20 states, the company mainly targets high income individuals earning more than $100,000 a year.

In 2012, the company earned $2.86 billion with a net profit of around $4 million in the first quarter of 2013 compared to a loss of $2.8 million a year ago. The real estate market is volatile; however, Toll Brothers Inc (NYSE:TOL) has a sufficient number of rental apartment projects in the pipeline. That suggests the company can handle the market conditions and can negotiate a downturn pretty well.

Rising real estate market

Around 2005, new home sales peaked before making a rapid descent. Lenders started to provide more and more loans to home buyers without performing any due diligence. That ultimately led to the housing collapse and subsequently the financial crisis.

Toll Brothers Inc (NYSE:TOL) was also not immune to this crisis. However, from 2012, we find a reversal in trends and the pace of new home sales has begun to pick up. Reduced interest rates by the Fed also helped the cause. Presently, the housing market demand is at a peak and is gathering momentum after a brief lull of seven years.

The peer market

Most of the big builders have been rising, currently up around 54% from a year ago. More and more builders are going public, with the latest one being Arizona based step-up builder Taylor Morrison Home Corp (NYSE:TMHC). It made its initial public offer in April quoting at a price range of $20-$22 per share.

During 2012, Taylor Morrison Home Corp (NYSE:TMHC) generated $879 million in revenue and $82 million in net income. The stock has good fundamentals and has plenty of upside potential. The mean price target represents around 17% upside potential. The timing of the IPO has also been good and the stock has been rising since then. The IPO benefited from a recovery in new home sales following the housing crash since the Great Depression.

With a market capitalization of $800 million, the price to earnings (P/E) ratio of Taylor Morrison Home Corp (NYSE:TMHC) is higher than competitors like D.R. Horton and PulteGroup. The shares of the company are almost 6% higher post its IPO. I expect sales of this home builder to grow much more in the coming years if the company makes good use of its IPO proceeds. The short interest in this home builder has risen significantly from last year. In fact, it doubled from May 2012.  However, this will not have a deep impact on the stock as the short interest represents just 2% of the total float. I believe long term investors can make a good bet on this stock.