Toll Brothers: Luxury is the moat

Last week, I wrote about Berkshire Hathaway’s (BRK-A)(BRK-B) newest bet on the American homebuilding sector. And I did mention Toll Brothers (TOL) there alongside D.R. Horton (DRI) and PulteGroup (PHM).

But the more I think about Toll Brothers, the more I feel it deserves its own article. This company really does stand out, especially in today’s horrid housing market environment.

You see, today’s horrid housing market environment is mainly affecting middle-class buyers: nice families who make $100,000, $250,000 or even $500,000 per year. And those aren’t Toll Brothers’ typical target.

As the country’s leading luxury homebuilder, its clients tend to have some combination of higher incomes, more accumulated home equity, less household expenses, and the ability to make significant down payments or purchase a home outright with cash.

While that doesn’t mean Toll Brothers is absolutely immune to today’s troubles, it does put it in a much better place than its peers who cater to the less affluent.

I can see that up close on my morning walks since I pass through two brand-new Toll Brothers communities along the way. They’re so new that parts are still being built, which means I get to observe their quality and ongoing:

You might call it boots-on-the-ground research. Or at least sneakers on the ground.

Technically, as I explained last week, I’ve been doing that kind of research since I was a kid since my mom was a residential real estate agent. So I know that, as big of a factor interest rates are in the homebuying process…

They’re not everything.

There’s actually a much larger equation at play involving demographics, household formation, land availability, construction costs, and local supply. And since the U.S. faced a decade of underbuilding before the 2020s hit, we’ve got something to talk about.

I saw an observation on X that made an important point about Berkshire’s re-investment in Lennar (LEN) earlier this month – that it probably has little to do with predicting mortgage rate movement over the rest of this year.

That certainly tracks with the firm’s investment history, which isn’t known for short-term macroeconomic trades. Berkshire is much more focused on looking down the road. So it’s looking for homebuilders that can survive downturns and then thrive as soon as the good times pick up again.

It would be nice to think that such well-connected investors believe recovery is right around the corner. But it’s probably just not true considering the latest housing data.

On the one hand, new-home sales did increase 6.4% in August to a seasonally adjusted annualized rate of 684,000. That was their best showing so far this year and better than analysts expected.

Yet sales were still down 2% year over year. And the trailing 12-month pace is still stuck near where it’s been since 2022.

This makes sense considering how, according to my last look at the Mortgage News Daily Index, the average 30-year fixed mortgage rate is now 7.43%. That’s 268 basis points above its 20-year-average and just 36 below its shorter-term peak of 7.79% in October 2022.

As such, concessions are being made across most of the homebuilding sector. The median new-home price declined a significant 5.8% from August 2025 to $393,700, for one thing. And mortgage-rate buydowns, discounts, closing-cost assistance, and free upgrades are all on the table as well.

Existing home sales, meanwhile, are hovering around three-decade lows.

Yet weak housing activity and weak housing demand are not necessarily the same thing. The problem isn’t that Americans don’t want homes. We actually need them quite a bit.

It’s just that the current cost is too high – for most people, anyway.

Of course, just because a company has ready and willing clients doesn’t automatically make it a good buy. So here’s what else you need to know about Toll Brothers…

Brothers Robert and Bruce Toll founded it in 1967 when they began building homes in suburban Philadelphia. The company then went public in 1986 and now operates in more than 60 markets across the U.S.

Today, its business model is broader than the word “luxury” might suggest. The homebuilder basically serves move-up, active-adult, empty-nester, second-home, and affluent first-time buyers.

It also operates architectural, engineering, mortgage, title, land-development, smart-home technology, landscaping, and building-components businesses. This vertical integration gives it greater control over the customer experience along with additional revenue outlets.

And speaking of the customer experience, Toll Brothers offers a wide array of structural changes, upgraded finishes, and lot premiums to its clientele. During fiscal 2026, the average personalization value was about $207,000 per home – equal to roughly 24% of the average base sales price.

So, yeah. Toll Brothers’ clients aren’t hurting too much, so it isn’t either.

That shows nicely in the company’s fiscal third quarter, where it delivered 2,662 homes at an average price of $996,400. That generated $2.65 billion in home-sales revenue.

Admittedly, deliveries and revenue declined year over year, and net income fell to $280.1 million, or $2.97 per diluted share. But adjusted home-sales gross margin exceeded management’s guidance at a healthy 25.6%. And net signed contracts rose 5% year over year, while cancellations fell from 7.5% of quarterly contracts to just 5.4%.

Toll Brothers ended the quarter with $1.06 billion in cash and $2.24 billion available under its revolving credit facility for a total $3.3 billion of liquidity. Its net debt-to-capital ratio was just 15.6%, stockholders’ equity hit $8.53 billion, and book value rose to $92.36 per share.

Another important detail to note about Toll Brothers is how it controlled approximately 75,500 lots… but owned only about 42% of them.

That distinction matters since optioning land reduces upfront capital requirements and gives management greater flexibility under negative housing conditions.

Throughout all of this, Toll Brothers is busy using its financial strength to expand community growth and return capital. It repurchased around 1.4 million shares for $206.8 million during the quarter.

Those shares recently traded near $136.51, which translates to 11x trailing earnings, 10.3x forward earnings, and about 1.5x third-quarter book value. None of those make its stock valuation distressed…

But they also don’t appear excessive for a premier homebuilder with affluent customers, strong margins, and conservative leverage.

Analysts expect low double-digit growth in 2027 and 2028. And I believe shares could return 20% over the next 12 months, even with their very modest dividend below 1%.

As always, risks do exist. They include persistently high mortgage rates and overall weaker consumer confidence, as well as the potential for further declines in deliveries, margin pressure, and potential land impairments.

Ultimately, Toll Brothers is still a cyclical homebuilder. So buyers, be aware.

However, it does still stand out among its peers thanks to its luxury brand and balance sheet. And today’s valuation offers a reasonable – though not enormous – margin of safety to take advantage of that combination while we still can.

Happy SWAN investing,

Brad Thomas
Editor, Wide Moat Daily