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Toll Brothers Inc (TOL), Meritage Homes Corp (MTH): A Niche Market Success Story

The housing markets still have room to run as the economic recovery of the country continues. What investors need is a company that can promise sustained growth in the coming years and for that purpose, I have selected a company known as Toll Brothers Inc (NYSE:TOL). Toll Brothers Inc (NYSE:TOL) designs, build and markets attached and detached homes in luxury residential communities. Let’s analyze why the company is positioned for growth.

Toll Brothers Inc (NYSE:TOL)

Future growth prospects for Toll Brothers Inc (NYSE:TOL)

Toll Brothers Inc (NYSE:TOL) has a focused approach of targeting rich states like California, Texas, Miami and New York. Along with that, the company has been showing robust growth in its financial performance. In its 1Q13 results, the company reported a Year-over-Year (YoY) increase of 32% in revenue. The backlogs of the company stood at a solid $1.86 billion against a figure of $1.12 billion last year.

Toll Brothers Inc (NYSE:TOL) targets a niche market that caters to the affluent American consumer only. Approximately, 78% of the homes sold by Toll Brothers Inc (NYSE:TOL) are under the $700,000 bracket. The average selling price of the company’s homes has increased by 3.6% in the second quarter to a figure of $577,000. Furthermore, Toll Brothers is the only publicly listed U.S. luxury home builder. Due to this, the company has significantly larger access to capital for expansion. Other private players in the industry have remained capital constrained, which has limited their operational capabilities.

Another upside to the company is that it develops the widest variety of homes in the United States. Along with that, it has slowly entered the high-rise market. Its City Living pipeline has numerous high-rise residential properties under development in cities like Philadelphia and New York. This is a great niche carved out by the company as these major cities have a resounding affluent class that will definitely be interested in purchasing properties developed by a luxury builder.

Toll Brothers also benefits from its integration in the home building business. ESE consultant is a wholly owned subsidiary of Toll Brothers. Having an in–house engineering company allows several benefits to Toll which include superior land acquisitions and the maximization of land value. Toll Brothers also owns a Panel & Truss Plant through which the company is able to manufacture and distribute floor and roof trusses, windows, wall panels and doors. Another business of Toll Brothers goes by the name of TBI Mortgage. The company has served 70% of Toll’s buyers in the 1Q13. With such wide integration, Toll will continue to exploit the recovery in the U.S. residential markets.

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