Why Are Toll Brothers (TOL) Shares Soaring Today

What Happened:

Shares of homebuilding company Toll Brothers (NYSE:TOL) jumped 6% in the afternoon session after the company reported second quarter earnings results, with revenue and EPS exceeding Wall Street's expectations. TOL noted that net signed contracts rose approximately 11% in both units and dollars, year on year. Management observed "solid deposit and traffic activity through the first three weeks of August." Furthermore, the company provided positive updates on the macro outlook for the housing market, adding, "With mortgage rates at their lowest point in a year and trending lower, favorable demographics, and continued imbalance in the supply and demand of homes for sale, we are optimistic that demand will remain solid through the end of fiscal 2024 and into 2025." Moving on, the company provided full-year EPS guidance ahead of consensus estimates. Overall, this was a strong quarter for the company.

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What is the market telling us:

Toll Brothers’s shares are somewhat volatile and over the last year have had 14 moves greater than 5%. In context of that, today’s move is indicating the market considers this news meaningful but not something that would fundamentally change its perception of the business. 

The biggest move we wrote about over the last year was about a month ago, when the company gained 6.5% as investors seemed to be rotating out of large-cap tech winners like NVDA, GOOGL, and MSFT and into smaller cap stocks, with housing stocks as a bright spot in particular. The rotation was likely sparked by the inflation report by the Bureau of Labor Statistics. It revealed that CPI (Consumer Price Index - a gauge of the average price consumers pay for goods and services) for the month of June 2024 came in better than expected at 3% year on year (the lowest level in more than three years). 

The recent inflation prints supported the argument that the Fed will start cutting rates this year as the headline figures moved closer to the 2% target. 

Lower rates greatly impact the housing market, which has been tepid in the last year-plus. Specifically, lower rates make homebuying more affordable for consumers because on the same value home, monthly payments are less with a lower mortgage rate. 

Before rates began to rise 2022, many potential homebuyers anchored on a home value they could afford--let's say $450,000. As rates rose, the home they could afford with the same monthly payment fell--let's say towards $300,000. However, they weren't very excited about buying a lesser home after having their eyes on higher-value homes. Many chose not to transact. On the other side of the coin, many homeowners with mortgage rates in the 2-3% range chose not to sell because of the prospect of having top buy a new home with a 6-8% mortgage rate attached to it. Demand suffered. Supply suffered. Today's inflation report could be an early sign that the housing market could thaw and even become hot if the Fed cuts rates.

Toll Brothers is up 40.8% since the beginning of the year, and at $141.95 per share it is trading close to its 52-week high of $143.09 from July 2024. Investors who bought $1,000 worth of Toll Brothers’s shares 5 years ago would now be looking at an investment worth $4,028.

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