This Homebuilder Has 'Attractive' Risk-Reward, Says Bullish Analyst

Last year’s major overhang for homebuilders, specifically Toll Brothers Inc (NYSE: TOL), is this year’s catalyst, according to Oppenheimer analysts.

Toll Brothers ended last year with a significant backlog of homes, steering Oppenheimer’s analysts to initiate coverage on the stock.

The Toll Brothers Analyst: Oppenheimer’s Tyler Batory initiated coverage on Toll Brothers with an outperform rating, with a $71 price target.

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“We see less downside risk to gross margin than with other builders given its to-be-built business model and backlog,” Batory said in a note to investors Thursday. “These factors should also allow the company to be patient in terms of managing its pace and price in FY23.”

Batory noted that Toll Brothers sells to an affluent buyer, giving the company the best balance sheet and leverage profile in its history, which should offer some price protection in the current environment.
"With shares trading at only 0.92x FY23E BVPS, we think the risk/reward is attractive," the Oppenheimer analyst wrote.

The analyst mentioned Oppenheimer is modeling a 26.6% gross margin for Toll Brothers in 2023.

Oppenheimer’s catalysts for Toll Brothers:

• Lower mortgage rates
• Improvements to material costs and supply chain
• 1Q23 orders ahead of consensus

Oppenheimer’s downside scenario:

• Higher mortgage rates and uncertain economic environment
• negatively impact demand for its homes
• Declining profitability could result in land impairments
• 1Q23 earnings miss consesnus expectations

Oppenheimer’s upside scenario:

• Lower mortgage rates reinvigorate demand for homes and allow the
• company to grow price and volume
• Improvements to cycle times enhances returns
• Lower material and labor costs contributes to gross margin upside

See Also: Toll Brothers Beat Earnings, But Are The Numbers Foggy?