Toll Brothers tipped for strong Q2

The firm will announce its first-quarter figures on Wednesday 27 May, and the housing market is being helped by low interest rates.

London stock exchange
Source: Bloomberg

The company’s share price went through a correction in April on the back of soft housing data from the US, but as the market is feeling more confident about housing in the US, the share price is picking up again. The fundamentals of Toll Brothers' business are strong, the firm reported a 78% jump in first-quarter profits. During the first three-months of the year, Toll Brother saw the number of completions rise by 18% and the average selling price rose by 13%. Toll Brothers is positioned at the higher-end of the housing market and the above-average-earners who Toll Brothers target aren’t under the same financial pressure that lower income households are.  

The macroeconomic environment is double-edged; the poor growth figures from the US in the first-quarter – due to the harsh winter – hurt the housing market as a whole, and at the same time it pushed back the possibility of an interest rate rise in the first half of 2015. Toll Brothers' share price will be particularly sensitive to an interest rate rise in the short-term, and when that becomes a reality it will weigh on the stock. Ultimately an interest rate hike will be healthy for the house builder in the medium-term as it will ensure a steady rate of growth in house prices, and once dealers get over the initial hump, the stock will push higher. Any pullbacks due to fear surrounding an interest rate increase will provide buying opportunities.

When Toll Brothers report its second-quarter figures, the market is expecting revenue of $861 million and earnings per share of 35 cents. The first-quarter numbers were received, and revenue was $853 million and EPS was 44 cents, while traders were anticipating $777 million and 29 cents respectively. The company will announce its full-year figures in December, and the market is expecting revenue of $4.25 billion and EPS of $2.11. These forecasts represent an 8.6% rise in revenue and a 10% rise in EPS.

Equity analysts are bullish on Toll Brothers, and out of the 22 recommendations, six are buys, 13 are holds and three are sells. The average target price is $39.63, which is 5% above the current price. Investment banks are also bullish on Lennar Corporation, and out of the 22 ratings, eight are buys, and 14 are holds. The average target price is $51.07, which is 5% above the current price.

The number of short positions being taken out on Toll Brothers has increased by 10% since the company reported its first-quarter numbers.

The share price has been in an upward trend since October, and $40 is the upside target. If the price moves through that level, it will bring $45 into play. Any pullbacks should find support at $35, and if that mark is punctured the next level of support will be in the $32.40 area.

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