On Thursday, Citi updated its outlook on Toll Brothers (NYSE:TOL), an American luxury homebuilding company. The firm's analyst adjusted the price target downward to $133.00 from the previous $139.00 while maintaining a Neutral rating on the stock. The revision came after Toll Brothers' shares experienced an 8% drop, in contrast to a 3% decline in the broader homebuilder sector, despite the company surpassing fourth-quarter earnings expectations and raising its fiscal year 2024 guidance.
Toll Brothers reported earnings before tax (EBT) of $650 million, which exceeded the consensus estimate of $596 million. The company also increased its fiscal year 2024 volume guidance to 10,400-10,800 deliveries, up from 10,000-10,500, and raised the average price guidance to $960,000-970,000 from the previous range of $940,000-960,000. Despite these positive announcements, the firm highlighted that the company's reiterated fiscal year 2024 gross margin guidance of approximately 28% suggests an estimated 60 basis point reduction in gross margins for the second half of the year.
The analyst noted that the stock's decline was likely due to a mix of factors, including an increase in speculative homes, which now account for over 50% of deliveries (up from 46% in the second fiscal quarter), and a normalization in geographic mix. During the first half of the year, there was a greater share of sales in high-margin Pacific markets. Following these developments, Citi raised its fiscal year 2024 earnings estimate by $0.45, reflecting the second fiscal quarter beat and updated guidance. However, the firm's fiscal years 2025-2026 estimates remain unchanged.
The new price target is based on applying a 1.7 times next twelve months (NTM) tangible book value (TBV) multiple, which was reduced from 1.8 times due to expectations of persistently higher interest rates. Despite the adjustments to the forecast, Citi's stance on Toll Brothers remains Neutral.
InvestingPro Insights
As Toll Brothers (NYSE:TOL) navigates the challenges and opportunities in the luxury homebuilding industry, insights from InvestingPro can provide investors with a clearer understanding of the company's financial health and market position. With a Market Cap of approximately $12.27 billion and a P/E Ratio that stands at a modest 8.04, Toll Brothers is trading at a low earnings multiple, which could signal a potential value opportunity for investors. Furthermore, the company's PEG Ratio, which measures the P/E relative to the earnings growth rate, is at an attractive 0.46, suggesting that the stock may be undervalued given its growth prospects.
InvestingPro Tips indicate that Toll Brothers has a track record of maintaining and raising dividends, with dividend growth over the last twelve months at 9.52%. This consistent dividend performance, combined with the fact that the stock price has seen a significant uptick with a 6 Month Price Total Return of 40.27%, may appeal to both income and growth-oriented investors. For those looking for more in-depth analysis and additional tips, there are 14 more InvestingPro Tips available, which can be accessed with a subscription. Users can utilize the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription.
Despite a recent price decline, the company's strong return on assets at 12.53% and its ability to exceed earnings expectations suggest a robust operational performance. With the next earnings date set for August 20, 2024, investors will be keen to see if Toll Brothers can sustain its positive momentum. The InvestingPro Fair Value estimate of $150.33 also provides a reference point for investors considering the stock's potential upside.
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