Constrained Housing Supply Will Sustain Luxury Home Demand

Key Takeaways

• Strong demand fueled by housing inventory shortages and demographic shifts is expected to support luxury home sales, pricing power, and steady revenue growth.
  
• Strategic land acquisition, operational efficiency, and expanded product offerings position the company to capture market share and maintain resilient margins amid changing trends.
  
• Weakening luxury home demand, heavier sales incentives, and reliance on affluent buyers threaten future growth, margins, and sustainability of the revenue pipeline.

Catalysts

Designs, builds, markets, sells, and arranges finance for a range of detached and attached homes in luxury residential communities in the United States.

• The ongoing nationwide shortage of for-sale housing inventory is expected to underpin strong demand and pricing power for Toll Brothers' offerings over the long term, especially as supply remains constrained and more buyers-particularly affluent move-up and downsizing buyers-seek new homes. This dynamic is likely to support future revenue growth and the ability to sustain higher average selling prices.
  
• Favorable demographic trends, such as affluent aging millennials and Gen X/Boomers increasingly forming households or moving up, are anticipated to benefit Toll Brothers' core luxury and move-up markets, creating a steady pipeline of demand that should help drive consistent revenues and margin stability even through macroeconomic fluctuations.
  
• Toll Brothers continues to expand community count at a projected 8-10% rate into 2025 and 2026, leveraging its strong land position and disciplined land acquisition strategy. This not only ensures a robust stream of future deliveries and revenues but also allows the company to capture market share as other builders face constraints, positively impacting long-term earnings growth.
  
• Increased investments in operational efficiency, supply chain management, and cost control are supporting strong SG&A leverage and competitive margins, demonstrating the ability to protect or slowly expand net margins even in periods of softer demand, which may be underappreciated in current valuation.
  
• Toll Brothers' broadening of its attainable luxury product range and its national, multi-market scale position it to benefit from shifting migration patterns (urban-to-suburban/Sunbelt) and increased demand for larger homes suited for remote/hybrid work, supporting long-term volume growth and revenue expansion.

Toll Brothers Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Toll Brothers's revenue will grow by 6.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 12.9% today to 12.5% in 3 years time.
• Analysts expect earnings to reach $1.6 billion (and earnings per share of $17.5) by about August 2028, up from $1.4 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.2x on those 2028 earnings, up from 9.5x today. This future PE is lower than the current PE for the US Consumer Durables industry at 11.5x.
• Analysts expect the number of shares outstanding to decline by 2.76% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.73%, as per the Simply Wall St company report.

Toll Brothers Future Earnings Per Share Growth

Risks

• Demand for luxury homes is showing signs of weakness, with net agreements down 13% in units and 11% in dollars year-over-year, and management reporting softer demand due to declining consumer confidence and economic uncertainty; this could lead to lower future revenues if the trend persists.
  
• Backlog, a crucial indicator of future deliveries and earnings, declined by 7% in dollars and 15% in units compared to a year ago, indicating the company may face challenges in sustaining current revenue and earnings levels into future periods.
  
• The company has increased sales incentives from an average of 5-6% to 7% of the average sales price to support demand, which, if continued, could erode net margins and earnings, especially if pricing competition intensifies in a soft market.
  
• The long-term strategy remains concentrated on affluent move-up and empty-nester buyers (around 70% of business); this reliance heightens exposure to macroeconomic downturns, shifts in demographic preferences, and potential contractions in the luxury housing market, all of which could negatively impact revenue and margins.
  
• Land acquisition spend is expected to slow, and management has tightened underwriting and reduced land spending for future deals, which could limit community count growth and revenue pipeline in fiscal 2026 and beyond if soft demand continues, further pressuring long-term earnings growth.

Valuation

• The analysts have a consensus price target of $140.812 for Toll Brothers based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $183.0, and the most bearish reporting a price target of just $92.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $12.7 billion, earnings will come to $1.6 billion, and it would be trading on a PE ratio of 10.2x, assuming you use a discount rate of 8.7%.
• Given the current share price of $133.35, the analyst price target of $140.81 is 5.3% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.