Strong Performance of Toll Brother's Stock Linked to Affluent Buyer Base

Despite speculation regarding rate cuts from the Federal Reserve, Toll Brothers' stock (TOL) is witnessing a solid performance this year. This success is largely attributed to the homebuilder's luxury positioning in the market and its affluent buyer base.

As of mid-morning Friday, Toll Brothers' stock was up nearly 9% year to date, outperforming the SPDR S&P Homebuilders ETF’s 6% gain. On the other hand, D.R. Horton (DHI), the largest competitor in the market, faced a dip of more than 3% for the current year.

The primary competitive advantage Toll Brothers possesses is a buyer base that remains relatively unaffected by mortgage rate volatility. Unlike their counterparts, Toll Brothers' consumers have less dependency on the fluctuations in mortgage rates due to their substantial financial standing.

Positioning itself as America's go-to luxury homebuilder, Toll Brothers reported in its most recent quarterly results that 25% of its buyers conducted all-cash transactions. The average price for its properties stands well over $1 million.

Analysts believe the robust performance of Toll Brothers is tied to increased household wealth correlating with an upswing in the stock market. Rafe Jadrosich, US homebuilders and building products analyst at Bank of America, suggests the rise in demand can be attributed to this "wealth effect.”

According to Ana Garcia, an analyst from CFRA Research, Toll Brothers' target audience significantly uplifts the company's performance against its competitors, as these luxury consumers are relatively unaffected by varying rates.

Toll Brothers disclosed a 40% increase in orders YoY in its fiscal first quarter ending Jan. 31. The company also revised its guidance for this year's home deliveries upward.

Analyzing the company's recent quarterly performance, Garcia pointed out no significant fluctuation in home closing volumes for Toll Brothers over a two-year review period. This stability contrasts with homebuilders catering to entry-level consumers who experienced double-digit declines in home closings.

Additionally, the average selling prices of Toll Brothers' houses have sky-rocketed by 14.5%, outperforming their competitors. In terms of gross margins, Toll Brothers has also fared better over this two-year period than homebuilders who cater to first-time buyers.

Unlike other homebuilders, Toll's reliance on mortgage rate buydowns, a practice that allows builders to cover a portion of the interest rate buyers pay on a loan, is minimal. The lack of need for such incentives, given their affluent consumer base, is another reason industry-watchers view the company's performance favourably.

Doug Yearley, Toll Brothers' CEO, noted in a recent earnings call that a majority of their customers qualify for a market rate mortgage without a buydown, proving Toll Brothers' ability to attract and retain financially secure customers. This approach remains consistent even as two major US homebuilders hesitate to cut back on incentives.