Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

PulteGroup, Inc. (PHM), Hovnanian Enterprises, Inc. (HOV): Is Toll Brothers Inc (TOL) Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Toll Brothers Inc (NYSE:TOL) fit the bill? Let’s take a look at what its recent results tell us about its potential for future gains.

What we’re looking for

The graphs you’re about to see tell Toll Brothers Inc (NYSE:TOL)’ story, and we’ll be grading the quality of that story in several ways:

1). Growth: Are profits, margins, and free cash flow all increasing?
2). Valuation: Is share price growing in line with earnings per share?
3). Opportunities: Is return on equity increasing while debt to equity declines?
4). Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you

Now, let’s take a look at Toll Brothers Inc (NYSE:TOL)’ key statistics:

TOL Total Return Price Chart

TOL Total Return Price data by YCharts.

Passing Criteria 3-Year* Change Grade
Revenue growth > 30% 43.3% Pass
Improving profit margin 305.60% Pass
Free cash flow growth > Net income growth (351.6%) vs. 394.8% Fail
Improving EPS 375.6% Pass
Stock growth (+ 15%) < EPS growth 75.7% vs. 375.6% Pass

Source: YCharts. *Period begins at end of Q2 2010.

TOL Return on Equity Chart

TOL Return on Equity data by YCharts.

Passing Criteria 3-Year* Change Grade
Improving return on equity 341.5% Pass
Declining debt to equity 0.20% Fail

Source: YCharts. *Period begins at end of Q2 2010.

How we got here and where we’re going

Toll Brothers Inc (NYSE:TOL) doesn’t come through with flawless performance, but five out of seven passing grades is a strong showing from the once-beleaguered housing sector. You could easily argue for a sixth passing grade based on functionally flat debt-to-equity levels over the past three years as well. However, Toll Brothers’ free cash flow has diverged from its net income over the past three years. Let’s dig a little deeper to see what Toll Brothers can do to improve this one weak spot

Many homebuilders such as Toll Brothers Inc (NYSE:TOL), PulteGroup, Inc. (NYSE:PHM), and Hovnanian Enterprises, Inc. (NYSE:HOV) are poised to capitalize on rebounding housing markets in the United States, which has finally begun to show signs of real life after trailing behind the market recovery. Fellow Fool John Maxfield points out that the housing market’s recovery has been driven by low interest rates and once-again attractive home prices, which compare favorably to increasing rental rates. Toll Brothers owns a large amount of land in urban areas, which will enable it to market its upscale offerings to a more well-heeled population. In an increasingly two-speed economy, that’s an advantage worth hanging onto.

My Foolish colleague Jason Hall notes that Toll Brothers should enjoy continued growth thanks to a solid backlog of about $2.4 billion in customer orders, with an average cancellation rate of less than 5% in recent quarters. Toll Brothers has clocked its luxury homes at an average price of $577,000 so far this year. The persistence of low interest rates — remaining at 4.4% this week, roughly half the historical average — will be important to Toll Brothers’ continued progress.

Industry peer Hovnanian Enterprises, Inc. (NYSE:HOV), which is a far smaller player compared to Toll Brothers and Pulte, has yet to recover quite as well from the housing bust. Quite recently, Hovnanian Enterprises, Inc. (NYSE:HOV) reported an 18% increase in unit deliveries, but Toll Brothers’ unit deliveries shot up by more than 33% year over year. Pulte’s unit deliveries increased, but its new orders fell by 12% on a year-over-year basis. Out of these three homebuilders, Toll Brothers seems to be putting together the most consistent recovery, even though Pulte is presently in the lead in terms of three-year share-price growth.

Putting the pieces together

Today, Toll Brothers has many of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy — or to stay away from a stock that’s going nowhere.

The article Is Toll Brothers Inc (NYSE:TOL) Destined for Greatness? originally appeared on and is written by Alex Planes.

Fool contributor Alex Planes has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.