Bank of America Merrill Lynch analyst Michael Roxland boosted his price target on the luxury homebuilder to $49 from $42, keeping his "buy" rating, as he believes the company is going to outperform its peers, and benefits from the growing portion of the population that can afford the company's home. "We see further upside to TOL and the opportunity for continued outperformance versus peers driven by an acceleration in gross margins, a growing higher income demographic which also affords TOL relative defensiveness from higher rates, and attractive valuation."
Roxland notes that Toll Brothers is trading at two times tangible book, which is a discount to what it normally trades at, 2.2 to 2.3 times book. Shares of Toll Brothers were rising in early Tuesday trading, gaining 1.5% to $39.56.
Toll Brothers gets more than half of its sales in the Northeast and Mid-Atlantic regions, both of which are primarily higher-income regions. Despite a growing income inequality issue in this country -- Roxland noted that high-income buyers have been growing at a faster rate than all households -- this should benefit Toll Brothers, which targets that demographic. "Since 1995, the number of households earning $100k or more has increased 277% versus all households combined which has increased 23%," Roxland penned in the note. "Moreover, these buyers shield TOL to some degree from higher rates as modest rate increases are unlikely to discourage home purchases." Additionally, a healthy percentage of these buyers, perhaps as much as 25% to 30%, pay in cash, which Roxland says provides them with "another layer of defense." --Written by Chris Ciaccia in New York >Contact by Email. Follow @Chris_Ciaccia