Since July 2021, the S&P 500 has delivered a total return of 72.2%. But one standout stock has more than doubled the market - over the past five years, Toll Brothers has surged 179% to $164.09 per share. Its momentum hasn’t stopped as it’s also gained 21% in the last six months thanks to its solid quarterly results, beating the S&P by 12.6%.
Is now the time to buy Toll Brothers, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Is Toll Brothers Not Exciting?
We’re glad investors have benefited from the price increase, but we’re swiping left on Toll Brothers for now. Here are three reasons we avoid TOL, plus one stock we’d rather own.
1. Backlog Declines as Orders Drop
Investors interested in Home Builders companies should track backlog in addition to reported revenue. This metric shows the value of outstanding orders that have not yet been executed or delivered, giving visibility into Toll Brothers’s future revenue streams.
Toll Brothers’s backlog came in at $6.32 billion in the latest quarter, and it averaged 9.1% year-on-year declines over the last two years. This performance was underwhelming and shows the company is not winning new orders. It also suggests there may be increasing competition or market saturation. 
2. Revenue Projections Show Stormy Skies Ahead
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Toll Brothers’s revenue to drop by 2.9%, a decrease from its 7.5% annualized growth for the past five years. This projection doesn’t excite us and indicates its products and services will face some demand challenges.
3. EPS Took a Dip Over the Last Two Years
Although long-term earnings trends give us the big picture, we like to analyze EPS over a shorter period to see if we are missing a change in the business.
Sadly for Toll Brothers, its EPS declined by 5.7% annually over the last two years while its revenue grew by 2.6%. This tells us the company became less profitable on a per-share basis as it expanded.
Final Judgment
Toll Brothers isn’t a terrible business, but it isn’t one of our picks. With its shares outperforming the market lately, the stock trades at 12.6× forward P/E (or $164.09 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We’re pretty confident there are more exciting stocks to buy at the moment. We’d suggest looking at a top digital advertising platform riding the creator economy.
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