Toll Brothers Up 29% in 3 Months: How Should You Play the Stock Now?

Core Viewpoint - Toll Brothers, Inc. has experienced a significant stock rally, outperforming both its peers and the broader market, driven by strong fundamentals in the luxury homebuilding segment and effective operational strategies [1][5][21] Performance Overview - The stock has risen 29.3% over the past three months, exceeding the gains of the Zacks Building Products – Home Builders industry (27.9%), the Zacks Construction sector (11.3%), and the S&P 500 (8.6%) [1] - As of September 9, 2025, the stock price is $144.82, which is 14.6% below its 52-week high of $169.52 but represents a 67.1% premium to its 52-week low of $86.67 [2] Technical Analysis - The stock's current price is above both its 50-day simple moving average (SMA) of $127.43 and its 200-day SMA of $120.02, indicating a bullish trend [3] - Recent trading volume has been strong, with over 2.3 million shares traded, suggesting institutional interest [3] Driving Factors - Toll Brothers has a strong position in the luxury homebuilding market, with an average selling price (ASP) of $974,000 and a backlog averaging $1.16 million per home, indicating customer willingness to pay premiums [6][7] - The company has a robust land pipeline with 76,800 lots, 57% of which are controlled, and plans to increase its community count from 420 to 440-450 by year-end [7] - A balanced approach of 50% spec homes and 50% build-to-order homes has provided strategic flexibility and contributed to an adjusted gross margin of 27.5% in Q3 [8][9] Financial Strength - Toll Brothers ended Q3 with $852 million in cash and a net debt-to-capital ratio of 19.3%, highlighting its strong financial position [10] - The company returned $226 million to shareholders through dividends and buybacks and plans to repurchase $600 million of stock in fiscal 2025 [10] Challenges - Despite record revenues, net contracts fell 4% year-over-year, indicating a softer housing market [11] - Incentives for new contracts have increased to an average of 8%, reflecting pressure on margins [13] - Gross margins have decreased from 28.8% to 27.5%, influenced by higher incentives and market pressures [14] Market Conditions - Elevated mortgage rates around 6.5% continue to constrain affordability for many buyers, impacting sales decisions [16] - Broader economic uncertainty and inflationary pressures may affect consumer sentiment and demand [16] Valuation - Toll Brothers is trading at a forward 12-month P/E of 10.34X, below the industry average of 13.35X, suggesting it is undervalued relative to peers [18][19] - The stock's current pricing indicates potential for upside if fundamentals remain strong [18] Conclusion - Toll Brothers has shown strong performance driven by luxury market strength and operational efficiency, but faces challenges from softer sales volumes and margin pressures [21] - The company remains a stable investment within the homebuilder sector, with a Zacks Rank 3 (Hold), and should be monitored for future demand trends [21]