Toll Brothers: A Great Buy and Hold Stock With Risks in 2025

Key Points

• Toll Brothers' strong Q3 report is overshadowed by expectations for a weak Q4 that will impact the stock price action this year.
• The capital return is reliable in 2025, but buybacks may slow in the upcoming quarters.
• A pullback to target levels would be an opportunistic buying opportunity.

Toll Brothers NYSE: TOL is an excellent buy-and-hold stock, but there are risks for its share price and investors in 2025. The stock is a great buy and hold because of its operational quality, cash flow, capital return, and long-term supply-demand outlook. However, macroeconomic conditions are impacting the housing business in 2025 and point to sluggishness and weakness in the back half.

The primary sticking point is the guidance for deliveries, which fell short. The takeaway is that FQ3 was strong, profitability robust, and ample capital returns, but the situation may change abruptly in Q4 and early Q1. 

The market's reaction to the news suggests this market is peaking. The stock price declined by nearly 3.0% at the lows in pre-opening trading, indicating resistance at a critical level. That level aligns with prior price action in the low-$130s and is a likely ceiling for price action this fall.

The caveat is that this chart may be amid a reversal, the critical support level may be the neckline of a Head & Shoulders Pattern, so the pullback, if it materializes, may not be significant. The market may fall as low as $120, but support will likely be present.

If not, TOL stock could fall to the low $100 range before hitting its bottom and rebounding. 

Don’t Count on the FOMC to Spur Home Sales Soon

Don’t hold your breath on an FOMC interest rate cut to spur housing demand and save the day. The summer data revealed some weakening in the labor market but was otherwise aligned with trends producing economic growth and underpinning inflation.

With this in play, the FOMC needs a catalyst to move them to act aggressively, and the most likely culprit will be recession; recession isn’t good for home building stock, home builders are, in fact, among the most vulnerable to economic contractions. 

At best, the Fed can be relied upon to give the market what it wants, but in a measured dose unlikely to exceed 50 basis points within the subsequent six months.

A 50 basis point reduction in the base rate might bring the average 30-year mortgage down to just over 6.0%, the lowest in years, but it is unlikely to be low enough to spur existing homeowners into moving and unsticking the market. 

As it is, the CME FedWatch Tool reflects an 82% chance for one 25-basis point cut at the September meeting, as of late August, and only an 82% chance for two by year’s end. 

The company initiated a Q4 outlook, restating the full-year target to the low end range. This is weak compared to the full-year consensus figures reported by MarketBeat and suggests unexpected weakness in Q4 to offset strengths seen earlier in the year.

The weakened outlook is underpinned by weakness in leading indicators, including a 4% decline in signed contracts, a 10% decline in the backlog, and a 19% contraction in the backlog value. 

Toll Brothers Capital Return Is Safe in 2025

The capital return is safe in 2025 despite the headwinds. The company’s cash flow, even at the low-end range, will be more than sufficient to cover it while maintaining financial health. At the end of the quarter, the balance sheet highlights include diminished yet ample cash and increased liabilities offset by increased inventory, assets, and equity, which is up by 5% year over year, including the impact of repurchases. 

Stock repurchases reduced the count aggressively in Q3, falling by an average of 4.6% for the quarter and nine-month year-to-date period. There is a risk that the pace of buybacks will slow, but that may not be seen for several quarters yet. 

The analysts pose another risk for the stock price action in Q3 and moving forward. The analysts are bullish on Toll Brothers, rating it at a consensus of Moderate Buy with a 65% bullish bias; however, the price target uptrend stalled in Q3 and is unlikely to be invigorated by the guidance. The more likely scenario is that revisions will start capping upside and potentially putting downward pressure on the action.