Toll Brothers: Well-Positioned For A Changing Environment

seekingalpha11-09

Recent zoning regulation changes are expected to impact Toll Brothers positively.The company’s land-light strategy improves margins and allows Toll Brothers to work with riskier land lots.The overall ...

Source Link

Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.

Comments

We need your insight to fill this gap

Leave a comment

{"i18n":{"language":"en_US"},"isChannel":false,"data":{"share":"https://ttm.financial/m/news/2482043436?lang=en_US&edition=fundamental","thumbnail":"https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1755445620/image_1755445620.jpg","is_english":true,"pubTime":"2024-11-09 03:08","share_image_url":"https://static.laohu8.com/5a36db9d73b4222bc376d24ccc48c8a4","id":"2482043436","market":"us","top_or_hot":-1,"title":"Toll Brothers: Well-Positioned For A Changing Environment","media":"seekingalpha","content":"<div>\n<p>Recent zoning regulation changes are expected to impact Toll Brothers positively.The company’s land-light strategy improves margins and allows Toll Brothers to work with riskier land lots.The overall ...</p>\n\n<a href=\"https://seekingalpha.com/article/4735080-toll-brothers-well-positioned-for-a-changing-environment\">Source Link</a>\n\n</div>\n","source":"seekingalpha","html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>Toll Brothers: Well-Positioned For A Changing Environment</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nToll Brothers: Well-Positioned For A Changing Environment\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-11-09 03:08 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4735080-toll-brothers-well-positioned-for-a-changing-environment><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Recent zoning regulation changes are expected to impact Toll Brothers positively.The company’s land-light strategy improves margins and allows Toll Brothers to work with riskier land lots.The overall ...</p>\n\n<a href=\"https://seekingalpha.com/article/4735080-toll-brothers-well-positioned-for-a-changing-environment\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"BK4088","symbol_name":"住宅建筑","start_time":0,"source_url":"https://seekingalpha.com/article/4735080-toll-brothers-well-positioned-for-a-changing-environment","article_id":"2482043436","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1755445620/image_1755445620.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2482043436","pubTimestamp":1731092907,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"Recent zoning regulation changes are expected to impact Toll Brothers positively.The company’s land-light strategy improves margins and allows Toll Brothers to work with riskier land lots.The overall ","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"BK4088":"住宅建筑","TOL":"托尔兄弟","BK4585":"ETF&股票定投概念","LU0054578231.USD":"BGF SYSTEMATIC SUSTAINABLE GLOBAL SMALLCAP \"A2\" (USD) ACC","BK4588":"碎股"},"translate_title":"Toll Brothers：为不断变化的环境做好准备","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"TOL":0.9},"content_text":"Recent zoning regulation changes are expected to impact Toll Brothers positively.The company’s land-light strategy improves margins and allows Toll Brothers to work with riskier land lots.The overall number of homes delivered is up 11% YoY as of Q3 2024.Although the luxury real estate market is volatile, Toll Brothers is faring far better than most of its competitors.Kirpal Kooner  Overview Toll Brothers, Inc. (NYSE:TOL) is a large homebuilder that operates in various markets across the United States. The company constructs both single family houses and condos, and sold 9597 homes in 2023. 51% of its revenue comes from Western states (including the Pacific coast and Mountain states), and another 22% comes from the South. Toll Brothers focuses primarily on luxury homes, with average sales price of over $960k last year. Despite the recent volatility of this sector of the housing market, the company reported surprisingly solid Q3 results, with revenues of $2.72 billion which is up 2% YoY. Additionally, the company reported that it delivered 2,814 homes that quarter, representing an 11% increase from 2023 as well as an EPS of $2.60 which beat projections by $0.27. The company has been boosted by their presence in metropolitan areas with rapidly expanding populations, an efficient business model through which options are used to acquire land in order to limit debt and risk, as well as favorable regulatory changes. We believe that Toll Brothers has a very positive long term outlook since the demographic and regulatory factors which positively impact Toll Brothers' business will likely continue to accelerate. Toll Brothers Zoning Changes in California The bulk of Toll Brothers' western sales are in the extremely populous state of California. The company focuses on acquiring land with zoning and regulatory difficulties, with the intention of turning a large profit after sorting out those issues through processes such as rezoning. This strategy is very lucrative in California, where a combination of high housing costs and an unusually convoluted regulatory framework makes it such that land that is allowed to be developed is incredibly valuable. In recent years, California has moved towards loosening zoning laws, which, we believe, would make Toll Brothers' strategy more profitable and their land option holdings more valuable. New laws that were recently passed include SB684, which streamlined approval for development of up to 10 residential units on lots up to 5 acres, SB9, which allowed lots to be divided into two for dense housing, currently in court, AB1033, which allowed additional dwelling units ('ADUS') to be sold separately, AB480, which makes it easier for developers to access surplus land, and AB1633, which forced cities to approve or deny a project's environmental review in a timely manner. In total 56 bills were signed to streamline housing construction in California in 2023, with dozens in 2024 so far. Bills such as these have already had a massive impact in California, as demonstrated by the rapidly increasing amount of ADUs which have been built in the state in recent years. YIMBY Less strict zoning laws provide an opportunity for homebuilders to expand their operations in the state, as demonstrated by their impact on ADU construction. However, due to the novel nature of these laws and California's infamously slow regulatory approval process, we believe that a company like Toll Brothers with expertise in sorting out zoning and regulatory issues is best situated to navigate this rapidly changing market. As such, we believe that in addition to the construction industry as a whole benefiting from California's pivot to more permissive zoning, Toll Brothers in particular will gain more from these changes than their rivals. The Economist A potential risk to Toll Brothers being able to increase the profit they generate from California is that the state's slow population growth may suppress demand for new housing, similar to what happened to post-industrial cities in the Midwest such as Detroit or Cleveland in the late 1900s. However, we believe that a prerequisite to such a collapse in the demand for housing will certainly be demonstrated by sharp declines in housing prices - after all, a state cannot have among the highest housing prices in the nation if there is almost no demand for housing there. To that end, California's population has started to increase again last year, albeit by a meager annual rate of 0.1%, according to the state's department of finance. We believe that this demonstrates the state's population is likely to stagnate going forward rather than decline precipitously. Further, the state added over 123,000 housing units in 2022, representing the fastest rate since the Great Recession, as well as over 115,000 units in 2023, despite rapidly rising interest rates. We believe that these numbers imply that housing construction in the state would likely go even higher as interest rates come down. As such, we believe that California's housing shortage will ensure that demand in the state will remain high even as the state's population growth lags behind the national average. Presence in Growing Markets Excluding the northern region of the country, which only contributes 15% to Toll Brothers' revenue, only 3 (California, Maryland, and Oregon) of the 16 states non-northern where Toll Brothers operates saw their populations grow slower than the national average from 2020 to 2023 according to census estimates. This growth in population naturally drives up demand and prices, which is especially important for Toll Brothers since about half of the homes that the company sells are spec homes, or homes that are built without a specific buyer in mind. Spec homes are designed to appeal to a wide variety of consumers, and a buyer has to be found during or immediately after construction. In markets without fast population growth or a housing shortage, building spec homes could be very risky, since the company may lose money if a buyer cannot be found during construction. However, we believe that the rapidly expanding markets that Toll Brothers' focuses on allows them to deploy the strategy of building spec homes to improve their margins and reduce construction times. Author The population growth in these states has led to increased housing prices in many markets. In particular, Miami-Dade County, the most populated county in Florida, saw its median sales price for a single family home rise from $380,000 in December 2019 to $650,000 in early 2024, representing an astounding 71% increase. Meanwhile, housing prices have increased by 40% in Texas from 2019 to 2023, according to the Texas Controller's office. However, there have been signs that a recent price correction may moderate prices in some of these markets, particularly Austin. Nevertheless, we believe that the long term economic reality remains that as long as these states continue to gain population at a speed significantly faster than the construction of new housing units, housing prices can be expected to rise in those markets, which will benefit companies such as Toll Brothers. Furthermore, the company operates at the higher end of the construction sector, as demonstrated by their average sale price of nearly a million dollars for a home. We believe that rapidly rising housing prices in southern metros will expand the market for luxury homes far more than the market for budget homes, since the rapidly appreciating land prices will make construction of budget homes comparatively less viable. Purchasing Optioned Land Toll Brothers makes heavy use of the land-light strategy, where they purchase options to buy land instead of acquiring it directly. This allows land to be purchased as late as possible, and allows the company to control land with comparatively little capital. Largely due to this strategy of holding less land directly, the company has been able to achieve a very high return on equity of 21.8%. Furthermore, the land light strategy has allowed the company to maintain a very low debt to equity ratio of under 0.4. Most importantly, this strategy is used especially on land that requires dicey zoning approvals, which allows the company to pursue rezoning and regulatory approval which could make the optioned purchase of land very profitable if successful while limiting the risk if the approval process stalls out. In other words, the balance sheet risk is reduced because the danger of buying land that does not end up being developed is reduced. Additionally, we believe that this strategy would allow the company to control a large amount of land with relatively little capital in anticipation of favorable changes in regulation. Toll Brothers Furthermore, the smaller balance sheets of construction companies that use the land-light model helps insulate them against recessions. This was demonstrated by NVR, the largest homebuilder that uses the land-light model, which was able to remain profitable during the Great Recession. Nearly every other homebuilder was deep in the red, and average profit margins for the industry dropped to under -30% at the height of the credit crunch. This demonstrates the utility of having a smaller balance sheet, being able to back out of projects with more flexibility, and carrying a smaller debt burden, all of which are made possible by using the land-light strategy. Toll Brothers Profit Margin vs. Peers (Toll Brothers) The majority of homebuilders still use the traditional model of purchasing land outright before starting a project, largely due to the logistical difficulties of using the land-light model. This model is exceptionally rare in the West Coast, where Toll Brother is among the only major homebuilders who use this strategy. As such, we believe that Toll Brothers is better positioned than most of its peers to weather potential market downturns. Comparison to Other Homebuilders Toll Brothers has demonstrated incredibly consistent growth over the past decade. Every year from 2013 to 2024, the company saw its book value per share increase, with an average CAGR of 13%. Over that time period, the company's book value increased from $19.68 to $76.50. Furthermore, from 2013 to 2024, the company saw its earnings per share increase in all but two years, including every year after the pandemic. Over that time period, the company's earnings per share increased from just $0.97 to over $14, with an incredible average CAGR of 28%. The company is also a very consistent re-purchaser of shares, having bought back 50% of its stock since 2016. This level of consistency is very rare among the real estate industry, particularly in the volatile construction sector. We believe that Toll Brother's unusual stability and consistency suggest that it will continue to grow in the foreseeable future, and is a good option for investors looking to diversify their portfolio with an investment in the construction sector. Toll Brothers Toll Brothers Toll Brothers' financial position has been quite decent compared to its competitors. Out of the 5 largest American homebuilders (D.R. Horton, Inc. (DHI), Lennar Corporation (LEN), PulteGroup, Inc. (PHM), NVR, Inc. (NVR), and Taylor Morrison Home Corporation (TMHC)), Toll Brothers can beat three of them with a profit margin of 14.63%. It has also outpaced 3 of the 5 largest homebuilders in terms of return on equity, with a rate of 21.8%. Generally, larger construction companies are more stable and consistently profitable, so we believe that the fact that Toll Brothers' margins are comparable to the largest homebuilders in the nation demonstrates the effectiveness of the company's operations as well as its potential for growth. Author It is also notable that all of these companies, along with most of the construction sector, have been solidly profitable over the course of the past year despite exceptionally high interest rates. Mortgage rates north of 7% suggest that homebuilders should be struggling with abysmal demand, but the industry's impressive profit margins in this challenging environment demonstrates just how extensive the housing shortage is. We believe that if housing demand can remain steady in face of such high borrowing costs, homebuilders will continue to see long term growth regardless of macroeconomic headwinds until the housing shortage is largely resolved, which likely won't be the case for decades. As such, we believe that for the foreseeable future, construction companies are a very solid long term investment. Valuation To calculate Toll Brothers' fair valuation, we performed a DCF analysis. For this analysis, we assume that the overall market return over the course of the next five years will be 7%. We also assume that the corporate tax rate will remain at 21%, which seems likely given the results of the recent election. We calculated Toll Brothers' growth rate based on its EPS growth rate over the course of the past two years. AuthorAuthorAuthor Author This DCF analysis yielded a market capitalization of approximately 13.7 billion dollars, or $136.20 per share. The valuation would have been significantly higher if not for the relatively high debt the company has, which is typical for the construction industry. Anyhow, the valuation is 11.5% below the stock's current price of $153.84, so we believe that the current market valuation for the stock is fair, and that the stock is currently neither significantly overvalued nor undervalued. Regulatory Risk The greatest risk currently facing Toll Brothers is that the trend of loosening zoning regulations may reverse. Due to the company's strategy of taking the risk of attempting to rezone cheap land for development, they would be more heavily impacted by more restrictive zoning laws than most other construction companies. While zoning laws have generally gotten more permissive, especially in expensive states such as California, it is not a given that they will continue to do so. For instance, a California bill called SB9, which allowed homeowners to split their single-family lots to build 2 units, was struck down by a state court. Historically, it is incredibly rare for courts to rule that the state imposing less strict regulations violates the constitution, so rulings such as this demonstrate the wide-reaching influence that opponents to permissive zoning still wield. The judge's ruling currently only applies to a short list of plaintiff cities, but it sheds light on the risk that other passed and proceed zoning reform laws that would be favorable to Toll Brothers may be blocked or struck down. This poses a serious risk to the company in the short term. However, we expect zoning laws in states such as California to loosen in the long term because of steadily declining homeownership rates since renters are comparatively more supportive of permissive zoning laws than homeowners who want to see their houses appreciate in value. As such, we believe that pushback against less restrictive zoning poses only a short term risk to Toll Brothers', and that the company's long term outlook remains very positive. Conclusion  Toll Brothers' business model of using options to buy land to limit debt, rezoning land to increase its value, and building luxury homes primarily in southern and western markets fits into a very special niche. This unique combination makes the company exceptionally well suited for success in an environment where high interest rates makes borrowing difficult, public pressure is forcing many states to relax zoning and construction regulations, and droves of people are moving south searching for affordability and economic opportunities. Additionally, based on our DCF model, we believe that Toll Brothers' stock is currently not significantly overvalued. As such, we rate Toll Brothers as a buy.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"1","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.2","shortVersion":"4.29.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2482043436"}