Does Toll Brothers' Strong Revenue and Earnings Beat Make It a Buy?

By Motley Fool

In this segment from Market Foolery, host Chris Hill and Bill Barker from Motley Fool Funds talk housing in light of Toll Brothers' (NYSE: TOL) strong earnings report, with revenue up 22%. There's isn't enough housing to meet demand in some areas, and the luxury home builderhas a nice backlog of work ahead of it. But this is a cyclical stock in a cyclical sector, and it's just now beginning to catch up with the gains the broad market has made in recent years. After a 40% run-up in 2017, is this a time to buy?

A full transcript follows the video.

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Bill Barkeris an employee of Motley Fool Asset Management, a separate, sister company of The Motley Fool, LLC. The views of Bill Barkerand Motley Fool Asset Management are not the views of The Motley Fool, LLC and should not be taken as such.

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This video was recorded on May 23, 2017.

Chris Hill: Toll Brothers' second-quarter revenue rose 22%. Their profits came in higher than expected, and home sales are looking good. We talked about this earlier down at Fool Funds. We're almost at the halfway point of 2017, and I think it's fair to say that one of the trends in terms of general stocks so far this year is that things associated with the home tend to be doing pretty well. And Toll Brothers and home builders are no exception.

Bill Barker: Yeah. Home Depot, Lowe's, the home improvement stores are a real bright spot in retail.

Hill: Sherwin-Williams.

Barker: Not just AutoZone, there were other retailing disaster stories out there today, and there have been all quarter. Housing stands apart from that. It's been a good year for Toll Brothers stock, which differentiates it from the last three years. Over the long term, this has not been a market-beating stock. But you go back far enough, it's kind of close to the market's return. It provides that with a lot more fluctuation than the average stock. Right now, they're on a little bit of a roll. Housing is good, there's not enough housing available for demand, and they have increased their backlog, up to $5 billion, which is nice, to have all that to work on. It was a good quarter on top of the last of the couple for Toll Brothers. I think particularly in the place where they're operating, the luxury home market, that's a particularly good part of the economy. Rich people are doing well in America, and they're buying bigger houses.

Hill: So, even with the 40% run up this stock has had over the past year, do you still think Toll Brothers has a decent amount in the pipeline that they're probably not slowing down any time soon?

Barker: It's a cyclical stock. When to buy a cyclical stock --

Hill: Is not after it grows 40%? [laughs]

Barker: [laughs] No. That's the short story, it sort of answers itself. If you can get a cyclical stock at a solid company like this after it's declined 40%, you're usually going to do a lot better than if you buy after it's gone up 40%. The last time it had a year like the last 12 months, the calendar year, was 2012, it was up almost 60%. It's just barely back to the stock price it had at the end of 2012.

Bill Barker owns shares of Home Depot. Chris Hill has no position in any stocks mentioned. The Motley Fool recommends AutoZone, Home Depot, Lowe's, and Sherwin-Williams. The Motley Fool has a disclosure policy.