Expanding Geographies And Product Lines To Spur Growth In Home Sales And Revenue

Key Takeaways

• Expansion into more affordable housing and diversified geographies aims to boost sales and revenue by widening the customer base.
  
• Strategic land acquisitions and increasing the supply of spec homes focus on capital efficiency and quicker sales, enhancing margins and revenue growth.
  
• Toll Brothers' strategy risks include market volatility due to spec home reliance, sensitivity to economic downturns, mortgage rate changes, regional risks, and operational strains from expanding their product range.

Catalysts

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

• Expansion into a wider range of geographies and price points, including more affordable homes, diversifies revenue sources, potentially enhancing overall sales and revenue growth.
  
• Increasing supply of spec homes to about 50% aims to meet demand for quicker move-ins, which could positively impact sales velocity and revenue.
  
• Strategic land acquisition and development focused on capital efficiency, such as using option arrangements and joint ventures, is designed to improve margins and return on equity, impacting net margins positively.
  
• Buyback program aimed at repurchasing $600 million of common stock reflects strong operating cash flows and commitment to shareholder returns, potentially improving earnings per share (EPS).
  
• Growing community count by 11%, with plans for continued expansion in FY 2025, supports longer-term revenue growth through increased home deliveries.

Assumptions

• Analysts are assuming Toll Brothers's revenue will grow by 7.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 14.6% today to 0.1% in 3 years time.
• Analysts expect earnings to reach $1.6 billion (and earnings per share of $17.18) by about August 2027, up from $1.5 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $1.3 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.5x on those 2027 earnings, down from 9.2x today. This future PE is lower than the current PE for the US Consumer Durables industry at 11.7x.
• Analysts expect the number of shares outstanding to decline by 7.69% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 8.27%, as per the Simply Wall St company report.

Risks

• The reliance on spec homes, which represented about 54% of orders, might subject the company to greater market volatility and require increased incentives to sell these homes, potentially affecting gross margins.
  
• A significant portion of their revenue comes from high-end luxury homes, making Toll Brothers sensitive to economic downturns or shifts in consumer preferences, which could impact revenue and earnings.
  
• The changing dynamics of mortgage rates could influence buyer affordability and demand for new homes, impacting Toll Brothers' ability to sustain anticipated revenue growth.
  
• The geographic concentration in markets like New Jersey, Pennsylvania, and California exposes Toll Brothers to regional economic and regulatory risks that could affect sales and profitability.
  
• The emphasis on widening geographies and product range to include more affordable homes could strain operational efficiencies and affect net margins if not managed effectively.

Valuation

• The analysts have a consensus price target of $138.52 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 $180.0, and the most bearish reporting a price target of just $108.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $13.0 billion, earnings will come to $1.6 billion, and it would be trading on a PE ratio of 8.5x, assuming you use a discount rate of 8.3%.
  
• Given the current share price of $141.03, the analyst's price target of $138.52 is 1.8% lower. 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.