Toll Brothers, Inc. (TOL)

(9 February 2017)

TOL Business Summary

Toll Brothers Inc designs, builds, markets and arranges financing for detached and attached homes in luxury residential communities.

TOL Fundamentals

  • Price to Earnings: 14.25
  • Earnings Per Share: $2.19
  • Market Cap: 5.1B
  • Current Ratio: 4.14
  • Return on Equity: 9.15%
  • Return on Assets: 4.15%
  • Dividend Yield: 0.00%
  • Price to Sales: 1.05
  • Price to Book: 1.10
  • Price to Free Cash Flow: 35.51

Balance Sheet ($ in Millions)

  • Total Current Assets decreased $47.
  • Total Assets increased $331.
  • Total Current Liabilities increased $377.
  • Total Liabilities Increased $275.
  • Total Stockholder Equity increased $85.

Income Statement ($ in Millions)

  • Total Revenues increased $585.
  • Income from Operations decreased $10.
    • Massive increase in cost of revenues
  • Operating Income decreased $9.
    • Increase in sales, general and administrative costs.
  • Net income increased $9.
  • EBITDA increased $92.

Cash Flow Statement ($ in Millions)

  • Net Cash provided by operating activities increased $783.
  • Net Cash used in investing activities decreased $22.
  • Net Cash used in financing activities increased $452.
  • Free Cash Flow increased $794.

Highlights from Last 10 10-Qs

  • Small increasing trend in current / total assets.
  • Big increase in current liabilities for Q4/16
  • Like Meritage Homes, very cyclical revenue and income cycles.
  • Cash flow from operations trend is all over the place, but big increase in most recent quarter.
  • Decreasing trend in cash used for investing over the last two quarters.
  • TOL is using more cash for financing than previous quarters.

Entry Level: $26-27

  • Given the cyclical nature of the companies balance sheets, the charts indicate similar patterns. Right now, I am comfortable with the $27 price, because it has an upward trending support line along $24 – $26 – $27.

Exit Level: $40+

  • Right now, I believe the price is overvalued, however, on the sell side of things; the charts present solid resistance at the $40 level. So, if you enter at the $26 range, I would feel much obliged to sell at the $40 level, to prevent from hitting resistance and falling, thus losing profits.

Reasoning

  • For their last earnings call, TOL reported Q4 EPS of $0.67 vs. $0.99 expected, however they did increase revenues, $1.855B vs, $1.79B estimate.
  • Between Meritage and TOL, I prefer Meritage. TOL has no margin of safety, and at current prices, seems overvalued. Yes it is trading at under 20 times earnings, however, its trading at 54 times owner earnings, and it’s trading at 46 times its free cash flow.
  • It’s Cash to debt is not good, at 0.17, it’s ranked lower than 64% of the companies in it’s industry.
  • Also, it is trading at 1.19 times its Tangible Book value, and 2 times its NCAV.
  • Finally, the cyclical nature of the homebuilders business is something that doesn’t sit well with me in terms of a long term investment.
  • Also, another thing to consider is the possibility of a recession or a pullback in US GDP and Consumer Spending. If we see a retraction in the US Economy, it will make it extremely difficult for businesses like TOL and MTH to survive, given that they operate in the luxury real estate construction.
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