Will Recent News Take Toll Brothers Higher?

With shares of Toll Brothers (NYSE:TOL) trading around $33, is TOL an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Toll Brothers, together with its subsidiaries, designs, builds, markets, and arranges finance for detached and attached homes in luxury residential communities. It is also involved in building or converting existing rental apartment buildings into high-, mid-, and low-rise luxury homes. In addition, the company, through joint ventures, is developing a high-rise luxury condominium/hotel project and a for-rent luxury apartment complex. Further, it owns, develops, and operates golf courses and country clubs associated with various planned communities.

Toll Brothers is purchasing the home building business Shapell Industries Inc. in a move that will give the luxury home builder more business in the lucrative markets of California. The $1.6 billion cash deal will give Toll Brothers Shapell’s land portfolio of 5,200 home sites in the San Francisco Bay Area, metro Los Angeles, Orange County, and Carlsbad, Toll Brothers said in an announcement seen by Reuters.

T = Technicals on the Stock Chart Are Mixed

Toll Brothers stock has been in a range over the last year. The stock is currently trading sideways and looks set to continue. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Toll Brothers is trading above its rising key averages, which signal neutral to bullish price action in the near-term.

TOL

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Toll Brothers options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Toll Brothers Options

36.34%

63%

61%

What does this mean? This means that investors or traders are buying a significant amount of call and put options contracts as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

December Options

Flat

Average

January Options

Flat

Average

As of today, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a significant amount of call and put option contracts and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Mixed Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Toll Brothers’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Toll Brothers look like and more importantly, how did the markets like these numbers?

2013 Q2

2013 Q1

2012 Q4

2012 Q3

Earnings Growth (Y-O-Y)

-27.78%

40.00%

-250.00%

2521.38%

Revenue Growth (Y-O-Y)

24.33%

38.09%

31.88%

47.93%

Earnings Reaction

0.03%

2.94%

-9.05%

-1.75%

Toll Brothers has seen mixed earnings and rising revenue figures over the last four quarters. From these numbers, the markets have had mixed feelings about Toll Brothers’s recent earnings announcements.

P = Weak Relative Performance Versus Peers and Sector

How has Toll Brothers stock done relative to its peers, Comstock Holding (NASDAQ:CHCI), M/I Homes (NYSE:MHO), Meritage Homes (NYSE:MTH), and sector?

Toll Brothers

Comstock Holding

M/I Homes

Meritage Homes

Sector

Year-to-Date Return

4.73%

79.31%

-23.00%

18.74%

20.94%

Toll Brothers has been a poor relative performer, year-to-date.

Conclusion

Toll Brothers designs, builds, and markets buildings as well as homes. The company is purchasing the home building business Shapell Industries in a move that will give the luxury home builder more business in the markets of California. The stock has been in a range over the last year and is currently trading sideways. Over the last four quarters, earnings have been mixed while revenues have been rising, leaving investors with mixed feelings about the stock. Relative to its peers and sector, Toll Brothers has been a poor relative performer year-to-date. WAIT AND SEE what Toll Brothers does next.

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