The Bullish Research Boosting Toll Brothers Stock

• Toll Brothers Inc TOL shares have dipped 9 percent in the last three months, after hotting a high of $41.88 on August 18.
• JP Morgan’s Michael Rehau upgraded the rating on the company from Neutral to Overweight, while raising the price target from $41.50 to $45.
• Above-average fundamentals and an attractive stock valuation call for the upgrade, Rehau said.

Toll Brothers’ shares are up merely 4 percent YTD and 10 percent since January 1, 2013, versus the performance of its larger-cap peers, at 11 percent and 40 percent average gains, respectively, and as compared to a 1 percent decline and 44 percent gain in the S&P.

Analyst Michael Rehau believes that Toll Brothers’ current valuation offers “an attractive entry point,” since its shares are trading roughly in-line with its larger-cap peers as compared to its historical 10 percent premium.

Rehau added that Toll Brothers is likely to deliver an above-average fundamental performance in FY16, backed up above-average gross margin expansion and above-average EPS growth, driven by “an expected greater contribution from its higher margin California and City Living divisions.”

Moreover, there is strong visibility the company’s performance in FY16, given its product profile, solid labor relationships and lower interest rate sensitivity, “which we believe is a relative positive given recent investor concerns related to the group more broadly regarding labor constraints impacting deliveries and Houston continuing to slow,” the analyst wrote.

The EPS estimates for FY16 and FY17 are at $2.75 and $3.20, both of which compare favorably to the Street’s $2.71 and $3.00, respectively.