Why Susquehanna Is Buying Toll Brothers: Best Of Homebuilding Breed?

• On Monday, Susquehanna raised its rating on Toll Brothers Inc TOL to Positive, from Neutral.
• The firm also boosted its price target for the stock from $41.00 to $42.00.
• Shares of Toll Brothers are up almost 4 percent on Monday trading.

In a report issued Monday, Susquehanna analysts Jack Micenko and Soham Bhonsle boosted their rating on shares of Toll Brothers from Neutral to Positive, while increasing their price target by $1.00 to $42.00, as they think the current valuation and the Street’s estimates do not appropriately account for the company’s 2016 earnings potential. Based on their analysis, the experts believe consensus estimates leave room for upside, “due to a confluence of trends in 2016 as it relates to gross margin and mix.”

Specifically, the analysts think that the Street is underappreciating California and City Living results for 2016, and that the consensus gross margin estimate for 2016 is too low. Thus, they are boosting their 2016 EPS estimate by 8 percent, from $2.81 to $3.04, well above the Street’s consensus of $2.71.

The report highlights a few key points to take into account when considering an investment in Toll Brothers:

• The analysts at Susquehanna believe the company will provide better than expected 2016 gross margins guidance in late November or early December.
• Consequently, they think that 2016 consensus estimates are about 10 percent too low.
• “Longer ￿cycle ￿times ￿= ￿higher ￿visibility ￿to￿ forward￿ revenue.”
• Despite having increased their estimates, the analysts believe their assumptions are still pretty conservative, or at least reasonable.

Disclosure: Javier Hasse holds no positions in any of the securities mentioned above.