MKM Names Toll Brothers A 'Top Pick'

In a report published Thursday, MKM Partners analyst Megan McGrath maintained a Buy rating on Toll Brothers Inc TOL, with a price target of $44, after meetings with the company management. Toll Brothers' stock continued to be a top pick in the homebuilding segment, the report said. The company's strengths lie in its expanding gross margins, driven by a mix shift to CA and NYC properties, increasing joint venture contribution from CityLiving deliveries and potentially less mortgage rate sensitivity from its buyer base. Toll Brothers is confident of benefiting from the overall growth in the housing market and the recent increase in the first time buyer activity. "We like TOL's medium-term and LT prospects for its CityLiving business, which we believe has delivered margins well in excess of the company average," analyst Megan McGrath mentioned. In the report MKM Partners noted that the company continued to have a steady pipeline of properties that were set to begin delivering through 2016-2018. Toll Brothers' management believes that "slow and steady increase in mortgage rates, as long as it is accompanied by continued improvements in the economy and labor markets, should be manageable for the housing industry," the report added. The EPS estimates for FY15 and FY16 has been raised from $1.98 to $2.03 and from $2.33 to $2.49, respectively. "We believe there could be upside potential to our estimate in FY16 if California momentum continues and CityLiving remains solidly on-schedule, but given the choppiness in the high rise business, we prefer to get a bit closer to FY16," McGrath wrote.