Toll Brothers (TOL)

Homebuilding company Toll Brothers (NYSE:TOL) reported Q1 CY2025 results topping the market’s revenue expectations, but sales fell by 3.5% year on year to $2.74 billion. Its non-GAAP profit of $3.50 per share was 22.4% above analysts’ consensus estimates.

Company Overview

Started by two brothers who started by building and selling just one home in Pennsylvania, today Toll Brothers (NYSE:TOL) is a luxury homebuilder across the United States.

Traditionally, homebuilders have built competitive advantages with economies of scale that lead to advantaged purchasing and brand recognition among consumers. Aesthetic trends have always been important in the space, but more recently, energy efficiency and conservation are driving innovation. However, these companies are still at the whim of the macro, specifically interest rates that heavily impact new and existing home sales. In fact, homebuilders are one of the most cyclical subsectors within industrials.

Competitors of Toll Brothers include D.R. Horton (NYSE:DHI), Lennar (NYSE:LEN), and PulteGroup (NYSE:PHM).

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Thankfully, Toll Brothers’s 8.7% annualized revenue growth over the last five years was decent. Its growth was slightly above the average industrials company and shows its offerings resonate with customers.

Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Toll Brothers’s recent performance shows its demand has slowed as its revenue was flat over the last two years.

We can dig further into the company’s revenue dynamics by analyzing its backlog, or the value of its outstanding orders that have not yet been executed or delivered. Toll Brothers’s backlog reached $6.84 billion in the latest quarter and averaged 4.6% year-on-year declines over the last two years. Because this number is lower than its revenue growth, we can see the company hasn’t secured enough new orders to maintain its growth rate in the future.

This quarter, Toll Brothers’s revenue fell by 3.5% year on year to $2.74 billion but beat Wall Street’s estimates by 9.9%.

Looking ahead, sell-side analysts expect revenue to grow 1.9% over the next 12 months, similar to its two-year rate. Although this projection suggests its newer products and services will catalyze better top-line performance, it is still below average for the sector.

All else equal, we prefer higher gross margins because they usually indicate that a company sells more differentiated products and commands stronger pricing power.

Toll Brothers has bad unit economics for an industrials company, giving it less room to reinvest and develop new offerings. As you can see below, it averaged a 25.4% gross margin over the last five years. Said differently, Toll Brothers had to pay a chunky $74.65 to its suppliers for every $100 in revenue.

Toll Brothers produced a 25.8% gross profit margin in Q1, down 5.6 percentage points year on year. Toll Brothers’s full-year margin has also been trending down over the past 12 months, decreasing by 1.9 percentage points. If this move continues, it could suggest a more competitive environment with some pressure to lower prices and higher input costs (such as raw materials and manufacturing expenses).

Toll Brothers has been a well-oiled machine over the last five years. It demonstrated elite profitability for an industrials business, boasting an average operating margin of 15.7%. This result was particularly impressive because of its low gross margin, which is mostly a factor of what it sells and takes huge shifts to move meaningfully. Companies have more control over their operating margins, and it’s a show of well-managed operations if they’re high when gross margins are low.

Analyzing the trend in its profitability, Toll Brothers’s operating margin rose by 7.3 percentage points over the last five years, as its sales growth gave it immense operating leverage.

In Q1, Toll Brothers generated an operating profit margin of 16.4%, down 6.6 percentage points year on year. Since Toll Brothers’s operating margin decreased more than its gross margin, we can assume it was less efficient because expenses such as marketing, R&D, and administrative overhead increased.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Toll Brothers’s EPS grew at an astounding 31.7% compounded annual growth rate over the last five years, higher than its 8.7% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

Diving into Toll Brothers’s quality of earnings can give us a better understanding of its performance. As we mentioned earlier, Toll Brothers’s operating margin declined this quarter but expanded by 7.3 percentage points over the last five years. Its share count also shrank by 21.9%, and these factors together are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.

Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.

For Toll Brothers, its two-year annual EPS growth of 3.6% was lower than its five-year trend. We hope its growth can accelerate in the future.

In Q1, Toll Brothers reported EPS at $3.50, down from $4.75 in the same quarter last year. Despite falling year on year, this print easily cleared analysts’ estimates. Over the next 12 months, Wall Street expects Toll Brothers’s full-year EPS of $13.52 to grow 6.1%.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Toll Brothers has shown robust cash profitability, enabling it to comfortably ride out cyclical downturns while investing in plenty of new offerings and returning capital to investors. The company’s free cash flow margin averaged 10.8% over the last five years, quite impressive for an industrials business.

Taking a step back, we can see that Toll Brothers’s margin dropped by 15.8 percentage points during that time. If its declines continue, it could signal increasing investment needs and capital intensity.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Although Toll Brothers hasn’t been the highest-quality company lately, it historically found a few growth initiatives that worked. Its five-year average ROIC was 13.5%, higher than most industrials businesses.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Toll Brothers’s ROIC has increased over the last few years. This is a good sign, and we hope the company can keep improving.

Toll Brothers reported $686.5 million of cash and $2.8 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $1.86 billion of EBITDA over the last 12 months, we view Toll Brothers’s 1.1× net-debt-to-EBITDA ratio as safe. We also see its $27.99 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We were impressed by how significantly Toll Brothers blew past analysts’ revenue and EPS expectations this quarter. Zooming out, we think this was a good print with some key areas of upside. The stock traded up 5% to $109.65 immediately after reporting.

Updated: June 19, 2025 at 11:28 PM EDT

A common mistake we notice when investors are deciding whether to buy a stock or not is that they simply look at the latest earnings results. Business quality and valuation matter more, so we urge you to understand these dynamics as well.

Toll Brothers’s business quality ultimately falls short of our standards. Although its revenue growth was good over the last five years, it’s expected to deteriorate over the next 12 months and its cash profitability fell over the last five years. And while the company’s expanding operating margin shows the business has become more efficient, the downside is its backlog declined.

Toll Brothers’s P/E ratio based on the next 12 months is 7.3x. While this valuation is optically cheap, the potential downside is big given its shaky fundamentals. We're pretty confident there are superior stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $137.25 on the company (compared to the current share price of $105.24).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.