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Toll Brothers Inc (TOL), Lennar Corporation (LEN) & KB Home (KBH): The Housing Recovery Is Making Luxury Affordable

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I have generally observed that investing in a company catering to a niche segment can go either way; it can be pretty lucrative, or lead to disastrous consequences when that particular segment faces economic crisis. Toll Brothers Inc (NYSE:TOL) is one of those companies that has successfully created a niche market for itself over time. It is the nation’s leading luxury home maker with a market cap of approximately $6.22 billion. With the current housing market recovery phase, the company is on track to achieve magnificent growth.

Toll Brothers Inc (NYSE:TOL)

Housing recovery is evident in the results

Thanks to a robust housing recovery, homebuilder stocks are becoming investor favorites as everyone is rushing to participate in the growth. Toll Brothers Inc (NYSE:TOL) recently announced second quarter results wherein net income increased by a sizable 43% on a year-over-year basis to $24.7 million. Homebuilding deliveries for the quarter increased by 33% in units, whereas backlog increased by 52% in units year-over-year. Besides an increase in volume of homes delivered and backlog, the company also benefited from an increase in the average price of the homes to $577,000, as compared to $569,000 in fiscal year 2013’s first quarter and $557,000 in FY 2012’s second quarter.

Good in many ways

Well, there is no doubt about the fact that Toll Brothers Inc (NYSE:TOL) has delivered excellent results, with a major point being pricing of the delivered homes. Winter is the best-selling season for homebuilders, and as such we saw big sales numbers for the company from January through April along with a reasonable increase in its backlog numbers. As a result of this increase in the backlog, the company has quite comfortably increased the prices without the fear of disturbing demand. Per its second-quarter earnings call, Toll Brothers Inc (NYSE:TOL) raised approximately $26,000 per home in the quarter.

Another thing in the results to be happy about was an improvement in the gross margin as a percentage of revenues. Management has announced an improvement of 275 points in margins over the second quarter owing to the delivery of high-margin high-rise projects and price increases. It is definitely a worthwhile factor because it shows the efficiency of the company regarding expense control and working on big revenue projects.

Industry rivals

The best part about Toll Brothers Inc (NYSE:TOL) is that it caters to a niche segment of the industry, allowing it to dodge competition from other big players. In addition to that, the current scenario of low interest rates and easy lending has put more money in the hands of customers, enabling them to move into luxury homes segment.

If we take a broader perspective, however, then one of Toll Brothers Inc(NYSE:TOL)’s biggest competitors is Lennar Corporation (NYSE:LEN), which has a market cap of a whopping $8.23 billion. Analysts have observed Lennar to be an overvalued stock, sighting concerns around increasing material and labor costs that are eating into its revenue and diminishing net earnings. I believe that Lennar Corporation (NYSE:LEN) has a good amount of business ahead in second half of 2013, and its first quarter results bear testimony to the fact that it has maintained adequate financial discipline.

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