Toll Brothers, AWarren Buffett Stock Competitor, Has Gained 76% Ahead Of Q4 Earnings

Earnings for luxury homebuilder Toll Brothers (TOL) are expected to hit an all-time high this year, buoyed by increased home deliveries and surging unit prices. In the overall housing market, interest rate hikes and high mortgage rates have stifled the supply of existing homes, boosting the market share for new homes. TOL shares edged lower Monday.

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Toll Brothers announces fiscal fourth-quarter earnings after the market closes Tuesday with analysts expecting profit to slip 34% to $3.72 per share with sales declining 25% to $2.78 billion. That would mark the company’s first earnings slip in more than two years. For the full year, Wall Street sees EPS gaining 10% to $11.97 and revenue decreasing 5% to $9.74 billion.

In the third quarter, Toll Brothers reported better-than expected earnings and revenue. The company also reported its backlog value at the end of Q3 totaled $7.9 billion, down 30% compared to last year.

At the time, Toll Brothers forecast Q4 deliveries between 2,650-2,750 units. The luxury homebuilder also expects the average price per unit in the fourth quarter to be between $1.005 million-$1.025 million.

For the full year, the company predicts between 9,500 and 9,600 home deliveries with an average home price between $1.005 million-$1.015 million. At the end of Q2, Toll Brothers forecast full-year deliveries of 8,900-9,500 with an average delivered price per home between $975,000-$995,000.

Toll Brothers stock edged down 0.7% to 87.18 during Monday market action. Meanwhile, TOL competitor and Warren Buffett-backed housing stock D.R. Horton (DHI) is flashing a buy signal. D.R. Horton is also on the IBD Leaderboard.

Warren Buffett’s Housing Market Bet

Last month, the Warren Buffett stock reported better-than-expected fiscal fourth-quarter earnings and revenue. D.R. Horton, the largest publicly traded homebuilder measured by market capitalization, announced fiscal Q4 EPS fell 5% to $4.45 while sales increased 9% to $10.5 billion.

“Despite continued higher mortgage rates and inflationary pressures, our net sales orders increased 39% from the prior year quarter, as the supply of both new and existing homes at affordable price points remains limited and demographics supporting housing demand remain favorable,” Chairman Donald R. Horton told investors at the time.

Warren Buffett’s Berkshire Hathaway (BRKB) holds a 1.76% stake in D.R. Horton. Earlier this year Berkshire bet on the supply-constrained U.S. housing market with Warren Buffett opening new positions worth a total of more than $800 million in S&P 500 stocks Lennar (LEN), D.R. Horton and NVR (NVR).

Toll Brothers Stock: The Housing Market

The U.S. is in a long-term housing shortage. For decades, the construction of new homes has failed to keep pace with the growing population. Rising material costs, supply-chain issues and labor shortages since the Covid pandemic have exacerbated the issue.

The shortage is currently running at a deficit of about 5.5 million homes, according to the National Association of Realtors (NAR). The gap is so large it would take more than a decade to close, NAR says, even if new-home construction accelerates.

The National Association of Realtors reported on Nov. 21 that existing-home sales fell 4.1% in October, slumping nearly 15% vs 2022, to a seasonally adjusted annual rate of 3.79 million. The median existing-home sales price rose 3.4% from one year ago to $391,800, the fourth consecutive month of year-over-year price increases.

Meanwhile, the inventory of unsold existing homes grew 1.8% from the previous month to 1.15 million at the end of October, according to NAR. That’s the equivalent of about 3.6 months’ supply at the current sales pace.

“While circumstances for buyers remain tight, home sellers have done well as prices continue to rise year over year, including a new all-time high for the month of October,” NAR Chief Economist Lawrence Yun said at the time.

Yun added that as mortgage rates have fallen in recent weeks there has been more buying interest.

“Though limited now, expect housing inventory to improve after this winter and heading into the spring. More inventory will result in more home sales,” he said.

The Commerce Department announced on Nov. 17 that housing starts in October increased around 2% sequentially to a seasonally adjusted annual rate of 1.37 million. However, housing starts fell 4.2% vs. last year. Building permits — a rough gauge of future activity — in October were at a seasonally adjusted annual rate 1.487 million, 1% above September rates but 4.4% below October 2022 totals.

Toll Brothers Stock And DHI Performance

U.S. homebuilder stocks rallied aggressively through the first half of the year, as rising interest rates slowed sales of existing houses. That slowdown channeled demand into the market for newly built homes.

The Building-Residential/Commercial industry group ranks No. 23 out of 197 groups tracked by IBD. Homebuilder stocks collectively have advanced around 38% so far in 2023.

Toll Brothers stock ranks second in the housing market industry group. TOL has a muscular 97 Composite Rating out of 99. The stock also has a 95 Relative Strength Rating. The EPS Rating is 97.

TOL shares have gained 76% in 2023. Toll Brothers stock hit a high of 87.12 on Nov. 15. Meanwhile, DHI shares dropped 0.3% to 130.47 Monday, after popping 2.5% on Friday to 130.86. That just cleared a 130.79 buy point from a cup-with-handle base.

The Warren Buffett stock has surged more than 30% since hitting a recent low in October.

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