Investors Are Getting a Deal on This Homebuilding Stock

Toll Brothers is ripe for a shift in analyst attention

Oct 22, 2021 at 10:59 AM
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Last week, we profiled an under-the-radar homebuilding stock. Now, we're going to take a look at a more household name -- no pun intended. Toll Brothers, Inc. (NYSE:TOL) is up 1.1% today to trade at $61.57, on track for its highest close in over a month. The shares are shrugging off a price-target cut to TOL yesterday, in which RBC trimmed its objective to $74 from $76. 

Toll Brothers stock is up 41% in 2021, likely enjoying tailwinds from the surge in home prices the last 18 months. Despite the uptrend, seven of the 12 brokerages in coverage maintain a "hold" or worse rating on TOL. However, the stock's consensus 12-month price target of $70.68 is a healthy 15% premium from its current perch, suggesting last night's price-target cut could be just the beginning.

From a fundamental point of view, Toll Brothers has maintained steady revenue growth in recent years with the exception of 2020. TOL's revenues are currently up 43% since fiscal 2017, despite reporting a 2% decrease in fiscal 2020. The homebuilder hasn’t been as consistent on the bottom-line, experiencing 40% decrease in net income between fiscal 2018 and fiscal 2020.

Nonetheless, Toll Brothers stock has a very intriguing valuation with a forward dividend of $0.68 and a dividend yield of 1.12%. TOL trades at a great price-earnings ratio of 11.73 and has a strong price-sales ratio of 0.90, making a 15-25% jump in Toll Brothers' stock price very plausible in the short term. In addition, TOL has an excellent forward price-earnings ratio of 7.26, indicating that the company is expected to have significant earnings growth over the coming year, even after growing net income 47% over the past year.

Options traders have been focusing on puts, and an unwinding of this pessimism could fuel additional TOL upside. The equity's Schaeffer's put/call open interest ratio (SOIR) of 1.08 stands higher than 98% of readings from the past year, suggesting these short-term options traders have rarely been more put-biased. 

 

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