Measured Land Spending Will Secure Enduring Market Success

Key Takeaways

• Affordability constraints and inventory issues at lower price points could negatively affect future revenues.
  
• Reduced speculative starts and land acquisitions may slow revenue growth, affecting earnings potential and long-term prospects.
  
• Market pressures and strategic misjudgments could negatively impact revenues and margins amid uncertain economic conditions and growing inventory challenges.

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 company reported mixed results in the spring selling season. Although demand was solid in the first quarter, some markets experienced affordability constraints and growing inventories, particularly at lower price points. This could impact revenues if these trends persist.
  
• The company's decision to reduce overall speculative starts in the short term could slow its revenue growth, particularly if the demand does not materialize as expected, negatively affecting its earnings potential.
  
• The potential delay in the sale of a stabilized apartment property in one of Toll Brothers' joint ventures could impact other income and net earnings projections for fiscal 2025.
  
• While gross margins were slightly above expectations, continued uncertainty around the sales mix and necessary incentives to respond to affordability issues may pressure net margins moving forward.
  
• The company is closely monitoring its land expenditure and community growth in response to the mixed demand environment. A reduction in land acquisition activities due to poor market conditions could impact long-term revenue growth and earnings.

Toll Brothers Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Toll Brothers compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Toll Brothers's revenue will decrease by 0.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 14.0% today to 12.7% in 3 years time.
• The bearish analysts expect earnings to reach $1.4 billion (and earnings per share of $15.3) by about April 2028, down from $1.5 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 9.7x on those 2028 earnings, up from 6.1x today. This future PE is greater than the current PE for the US Consumer Durables industry at 8.0x.
• Analysts expect the number of shares outstanding to decline by 3.13% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.51%, as per the Simply Wall St company report.

Toll Brothers Future Earnings Per Share Growth

Risks

• The recent net income and earnings per share came in below expectations due to impairments and a delay in the sale of a joint venture property, which poses a risk to future net margins and earnings.
  
• Pressure from growing inventories and affordability constraints, especially in lower-end markets, could impact sales and consequently reduce revenues and earnings.
  
• The company's guidance assumes a continuation of mixed market conditions, which could imply risks if demand does not meet expectations, potentially affecting revenues and adjusted gross margins.
  
• The concentration and strategic management of spec homes based on local market conditions could present a risk if misjudged, impacting operating efficiency and net margins.
  
• Market fluctuations, such as potential slowdowns in specific regions and buyer hesitance due to economic conditions or interest rates, could negatively affect revenues and overall financial outlook.

Valuation

• The assumed bearish price target for Toll Brothers is $116.71, which represents one standard deviation below the consensus price target of $140.33. This valuation is based on what can be assumed as the expectations of Toll Brothers's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• 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 bearish analysts, you'd need to believe that by 2028, revenues will be $10.9 billion, earnings will come to $1.4 billion, and it would be trading on a PE ratio of 9.7x, assuming you use a discount rate of 8.5%.
  
• Given the current share price of $92.13, the bearish analyst price target of $116.71 is 21.1% higher.
  
• 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.