Toll Brothers Delivers, but Shares Fairly Priced

Given the strong performance reported by homebuilding peers for quarters ended in May and June, we expected

Toll Brothers’ mounting backlog positions the company for growth in the back half of fiscal 2016 and into 2017. The value of new contracts signed during the third quarter and the ending backlog value increased 18% and 19%, respectively, as all regions and the City Living portfolio contributed. The company continued to invest in new land, spending $459 million for 3,494 lots during the quarter. Total owned and optioned lot count increased 7% year over year and sequentially to 48,697 lots. We liked that the company was able to increase its capital-friendly optioned lot count to 13,103 from 9,662 in the year-ago quarter.

Toll Brothers continued to use its share-repurchase program during the quarter, buying 3.7 million shares at an average price of $26.33 per share, or about 1.1 times the current diluted book value per share, well below our fair value estimate. We like the company’s balanced capital-allocation strategy of opportunistically purchasing land for future growth and repurchasing undervalued shares.

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