Since my last report on December 9, 2021, Toll’s stock has fallen 26.3%, much more than the S&P Mid-Cap 400’s 2.6% decline. As I noted back then, shares of Toll and other homebuilders were ripe for a correction following their three-fold advance off the early pandemic lows. Yet, this correction has been more severe than I had anticipated, driven by persistent inflation, rising mortgage rates and most recently the uncertainty of the economic fallout from Ukraine.
With this correction, Toll’s stock is now valued at 5.4 times projected fiscal 2022 earnings of $9.93, well below its forward P/E multiple of 7.4 back in December. The company’s high backlog supports fiscal 2022 earnings, but the outlook for fiscal 2023 is less certain.
The low forward multiple suggests that fiscal 2023 earnings could decline sharply, if high mortgage rates persist and a Ukraine-induced global economic recession takes hold. On the other hand, a resolution of the war should ease commodity prices and interest rates, and thereby serve as a catalyst for a rebound in Toll’s stock. Given current challenges, which may take time to resolve, I am reducing my price target to $64 (from $72), but raising my performance rating to “2” (outperform) from “3” (neutral). The new PT represents a forward multiple of 5.9 times projected fiscal 2023 earnings of $10.78 and a potential 12-month total return of 21% from the current quote. The forward PT multiple is well below Toll’s and the homebuilders’ historical averages, which suggests further upside potential beyond the 12-month horizon. The correction may not be over, but if the earnings outlook holds, the stock probably will not remain this low for long.
This is a summary of my recent update on Toll Brothers published on March 21, 2022. To obtain a copy of the full report, call or send your request to me by email.
March 22, 2022
Stephen P. Percoco
Lark Research
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