Trade of the Day: Toll Brothers (TOL)

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Toll Brothers Inc (NYSE:TOL) — This builder of luxury homes, which operates in 20 states, is expected by Zacks to miss analysts’ estimates of 49 cents by 2% when Toll Brothers announces Q3 earnings prior to Tuesday’s open. However, a powerful record of growth, which is the result of excellent planning and long-term analysis of the housing market by management, might be a reason to believe that Zacks’ earnings estimates are too conservative.
Standard & Poor’s forecasts earnings of $2.30 in FY ’15, up from $1.84 last year. And Credit Suisse, noting that TOL exceeded Q2 forecasts (and that Wall Street underestimates Toll’s 2016 earnings potential), increased their FY15 estimate by 4 cents to $2.02 and FY16 estimates to $2.85, up from $2.78.
S&P also says that TOL’s geographic revenue mix and land holdings are more valuable than comparable builders, and that the company’s conservative business plan is to avoid speculative construction, unlike some of its peers. S&P’s 12-month target price of $41 is just 16.7 times forward EPS estimates, putting the price at a small, but warranted premium over its competition.
Technically, TOL stock is in a powerful uptrend that was confirmed on Aug. 12 with a breakout at about $39 following a consolidation that began in May. The break was probably the result of an upgrade by Benzinga’s analysts, who named TOL as one of their “top upgrades” with a revised 12-month price target of $48 from $35. But following the recent breakout, TOL fell several points on investors’ general market fears and pressures to raise cash.
Traders may continue to drive the stock to under its 50-day moving average at $38.55. Thus the “buy-under” price for TOL is $38 with a trading target of $45 by year’s end. If successful, our return would be over 18%.