Toll Brothers (TOL) Earnings Bode Well for Homebuilders

Toll Brothers, Inc. (TOL) is trading lower by more than 3% in Tuesday's pre-market despite beating fourth quarter 2020 top- and bottom-line estimates by wide margins. The east coast homebuilder posted a profit of $1.55 per share, while revenue rose 8.9% year over year to $2.5 billion. Net signed contract value rose an impressive 63%, while 3,407 contracted homes marked a 68% increase, signaling strong business conditions well into 2021. An earnings conference call is scheduled for 11 a.m. Eastern time today.

Residential construction stocks have booked outstanding returns since the March lows, underpinned by a dramatic exodus out of targeted urban areas and into rural and suburban settings. The rise of the virtual meeting space is driving this phenomenon as well as concerns about public safety and lifestyle in cities hit by summer protests. The transition of the millennial generation into their 30s and nest-building periods adds a third tailwind, predicting that this trend will grow in coming years.

The SPDR S&P Homebuilders ETF has lifted to an all-time high, while Toll Brothers stock continues to trade below 2005 and 2018 resistance levels. East coast home sales have been less robust than the South and West for many years, while those locations are now prime beneficiaries of the ex-urban migration. As a result, it isn't surprising that Dallas, Phoenix, and Miami-based homebuilders are sitting at the top of the sector leadership list.

The broad sector advance hasn't convinced Wall Street about the long-term outlook for Toll Brothers stock, with a dreary "Hold" rating based upon four "Buy," two "Hold," and four "Sell" recommendations. Price targets currently range from a low of $40 to a Street-high $60, while the stock is set to open Tuesday's session about $2 below the median $49 target. However, strong quarterly metrics could induce analysts to issue upgrades and raise price targets after Tuesday's conference call.

Toll Brothers Weekly Chart (2011 – 2020)

A multi-year downtrend ended at an eight-year low in the low teens in 2011, giving way to a steady uptick that stalled in the upper $30s in 2013. Breakouts failed in 2014 and 2015, yielding a secondary selling wave that posted a higher long-term low in the mid-$20s in 2016. A 2017 breakout above mid-decade resistance found willing buyers, reaching within six points of 2005’s all-time high in 2018, while the selloff into year end carved the second higher low in seven years.

Toll Brothers stock rallied within four points of the 2018 peak in February 2020 and plunged to a nine-year low in March, while the subsequent recovery wave completed a round trip into the first quarter high in September. Price action since that time has carved a rounded correction that could mark the handle in a bullish cup and handle pattern. If so, reward potential following a breakout could be substantial, predicting a measured move target into the mid-$70s. 

The Bottom Line

Toll Brothers is trading lower on Tuesday morning despite beating fourth quarter 2020 profit and revenue estimates. However, selling pressure could be short lived, with a morning conference call marking an opportunity for Wall Street analysts to reconsider their modest ratings.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.