4 Reasons This Stock Could Ring Up Gains
The cyclical homebuilding industry seems to finally, truly be turning around. And if you're looking for a company set to dominate its segment of housing, look no further than Toll Brothers .
Growth today, growth tomorrow
If you're looking for the most obvious reason to buy Toll Brothers, look at the company's top-line growth for today and tomorrow. In the current quarter, Toll Brothers reported revenue growth of 65%. Though Lennar reported 46% revenue growth, and PulteGroup reported 22% growth, Toll Brothers looks like a superstar compared to these two.
It's one thing to beat your competition for one quarter; it's something else to post results that suggest this outperformance will continue. If analysts are to be believed, Toll Brothers is on the cusp of several very big years of earnings growth.
In fact, over the next five years, the average analyst expects the company to grow earnings per share annually by more than 48%. When you compare this to PulteGroup's expected EPS growth of 27%, or the decline of 5% expected from Lennar, there is little question that Toll Brothers could be a clear winner going forward.
While analysts are often chided for being "surprised" when earnings are released, they have been pretty close in the last four quarters to predicting Toll Brothers results. On average, Toll Brothers has beaten estimates by 13% in the last four quarters, and in light of some of the numbers we are about to see, this 48% expected earnings growth looks realistic.
The second reason investors should consider Toll Brothers has to do with the potential in the company's backlog. Take a look at Toll Brothers' backlog growth compared to two of its peers, and you'll see what I mean.
Backlog Growth in Dollars (Q3 2012 to Q3 2013)
Backlog Growth in Units (Q3 2012 to Q3 2013)
Source: SEC Filings
Whether you want growth in revenue or units, Toll Brothers is clearly logging the best potential future growth of the group.
Can't cancel this
While Toll Brothers' backlog growth is impressive, the third reason to consider buying the company is its very low cancellation rate. In fact, if investors are looking just at each company's backlog growth, they're making a huge mistake.
For instance, though Lennar reported a 53% increase in backlog dollars, the company's cancellation rate is 18%. This means that if you factor in these potential cancellations, Lennar grew backlog dollars by slightly more than 43%. Whereas PulteGroup's backlog growth looks weak already, the company also sports an 18% cancellation rate. This means a 9% increase in backlog revenue could actually work out to growth of slightly more than 7%.
By comparison, Toll Brothers' cancellation rate is just 5.5%. This low rate is why the company's 57% backlog increase in revenue is probably closer to a 54% growth rate. Investors can have more confidence in Toll Brothers' backlog growth relative to its peers, because fewer buyers are cancelling their contracts.
A rising tide
A fourth reason to buy Toll Brothers is tied to the company's price increases in the last several years. There might not be a surer sign of pricing power and demand than a company's constantly rising prices. If we look at the average selling price of Toll Brothers' homes over the last three years, plus the average price of homes in the current backlog, the trend is clear.
Source: SEC Filings - 2014 projected
With three straight years of increased prices, and 2014 looking like another good year, Toll Brothers' earnings potential is obvious. The homebuilding industry is benefiting across the board from higher prices due to higher demand. However, the fact that most of Toll Brothers competition operates in the price range of $200,000 to $300,000 means there is much less competition at the high end, where Toll Brothers operates. With increased demand (as proven in their backlog) and less competition, continued pricing strength should be the result.
Ring it up
Toll Brothers' revenue, backlog, and price growth are huge reasons to consider buying the stock. Any doubt that the housing business is recovering should be put to rest if you look at the real numbers.
The CEOs of each of these companies made statements about improvements in the housing industry. Toll Brothers' CEO Douglas Yearley said, "New home production remains well below volumes needed to meet current demand, not to mention pent-up demand of the last seven years."
Years of pent-up demand, combined with a uniquely positioned company, sounds like a great formula for investors to ring up gains for years to come.
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The article 4 Reasons This Stock Could Ring Up Gains originally appeared on Fool.com.
Chad Henage has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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