On Monday, Raymond (NS:RYMD) James made an adjustment to the price target for Toll Brothers (NYSE:NYSE:TOL), a luxury homebuilding company, reducing it from $170.00 to $165.00. Despite the decrease, the firm maintained a Strong Buy rating for the stock. The revision follows a comprehensive review of Toll Brothers' fourth-quarter results from last week, which exceeded expectations.
According to InvestingPro data, the company maintains a "GREAT" financial health score, with strong profitability metrics including a 28.5% gross margin and 22% return on equity. The stock's RSI suggests it's currently in oversold territory.
The analyst from Raymond James highlighted that Toll Brothers' shares have fallen 18% month-to-date, mirroring a broader sector downturn due to concerns about potential margin pressures in 2025. However, the firm believes these risks are not evenly spread across the industry and that Toll Brothers' leading position in the luxury and aspirational move-up segments offers some insulation against the uncertainty facing entry-level homebuilders.
InvestingPro analysis indicates the stock is currently undervalued, trading at an attractive P/E ratio of 8.9x and maintaining strong dividend growth with a 9.5% increase in the last year.
The report further notes that while consumer confidence in housing was not at its best in October and early November, with increased selling incentives and growing unsold inventory, Toll Brothers demonstrated a robust year-over-year new order growth of over 30%. This growth is seen as a strong indication of persistent demand and the company's effective execution of its strategy.
Raymond James also pointed out that Toll Brothers is likely to benefit from significant demographic trends, including wealth effects and generational wealth transfers.
Despite the challenges presented by the election and hurricanes in Florida during the fourth quarter of 2024, the firm anticipates Toll Brothers to swiftly return to sustainable gross margins of approximately 27-28%, generate nearly $1 billion in cash flow, and achieve high-teens returns on capital in fiscal year 2025 and beyond.
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