The increase in interest rates the U.S. Federal Reserve is expected to implement over the course of 2022, and perhaps into next year, to curb the excessive rise in the price of goods and services could discourage the purchase of homes that, due to the low cost of borrowing, had its biggest driving factor in recent years.
If this applies to the poorer sections of the population, which the Covid-19 crisis has weakened more, it does not apply to the wealthier sections of the population, who can afford a significantly higher standard of living. They will continue to fuel the demand, which is expected to be strong on luxury homes.
As such, we could see a sort of rotation among homebuilder stocks over the coming months, with many of these companies giving way to those operating in the luxury housing subsector. Therefore, the share prices of luxury homebuilders could potentially yield significant gains.
While looking for opportunities among luxury homebuilders, I came across Toll Brothers Inc. (TOL, Financial), a leading U.S. company and a member of the Fortune 500.
The company's business is growing rapidly, data from its latest quarterly report shows.
Fourth-quarter results were staggering for the company as it saw record revenue of $3.04 billion. GAAP earnings were $3.02 per share, up 95% year over year.
The company also reported impressive improvements in contracts signed to $3 billion, up 10% year over year, and in the total value of homes inventory, reaching $9.50 billion for an increase of almost 50%.
Additionally, the adjusted gross margin increased 190 basis points to 25.9% of total sales. Toll Brothers had strong results over the past year with its land acquisition strategy, as the number of optioned lots increased 43% for nearly 44,500 lots added or about 55% of the total.
Douglas C. Yearley, the chairman and CEO of Toll Brothers, believes the luxury home market will continue to be driven by strong fundamentals into 2022 and beyond.
Despite expected continued headwinds from supply chain issues and labor constraints, the company is targeting significant total revenue growth of 20% year over year and community growth of 10% year over year through full-year 2022. The adjusted gross margin is expected to increase by 250 basis points thanks to strong pricing factors.
All these positive trends should result in a 20% increase in the value of the equity, according to the company's forecasts, compared to about a 17% growth rate of return in 2021.
In addition, Toll Brothers believes it has enough land to hope for further growth in 2023.
The stock was around $58.27 per share in early trading on Tuesday versus the 50-day moving average of $66.68 and the 200-day moving average of $61.72. So the stock doesn't look expensive based on this comparison.
Toll Brothers has a market cap of $6.97 billion. The price-earnings ratio is 8.75 versus the industry median of 9.55, the price-book ratio is 1.32 versus the industry median of 1.31 and the price-sales ratio is 0.83 versus the industry median of 0.97.
The company pays quarterly dividends. The last distribution of 17 cents per common share was issued on Jan. 21 for a trailing 12-month dividend yield of 1.17%. The S&P 500 yields 1.34% as of the time of writing.
Toll Brothers is an attractive investment opportunity due to its favorable share price and the company's growth prospects.
As of February, the stock has five strong buy, seven buys, nine hold and one underperform recommendation rating. The average target price is $75.07 per share, reflecting more than 29% upside potential.
