Please ensure Javascript is enabled for purposes of website accessibility

Why Toll Brothers Stock Rocketed 13% Higher in September

By Reuben Gregg Brewer - Oct 8, 2019 at 8:24AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

A debt sale provided some breathing room.

What happened

Shares of Toll Brothers (TOL 1.11%), one of the largest homebuilders in the United States, rose 13% in September, according to data provided by S&P Global Market Intelligence. What's most interesting about the big monthly advance, however, is that it basically started on Sept 9. And while other homebuilders had decent months, too, it was a couple days of big gains following Sept. 9 that pushed Toll's monthly gain into the double digits.

A tool box with tools in it and a hardhat next to it.

Image source: Getty Images.

So what

The big news was that Toll Brothers issued $400 million of debt, which it announced on the 9th. The notes carry a modest interest rate of 3.8% and mature in 2029.

There are a couple of worthwhile takeaways here. First, Toll Brothers was able to issue the bonds at a solid rate, showing the debt investors are generally positive on the company's prospects and ability to pay.

Which taps into the second key issue: Toll Brothers has a fair amount of leverage on its balance sheet. For example, Toll Brothers' debt-to-EBITDA ratio is around 4.1 times compared to more conservatively financed peer PulteGroup, which has a debt-to-EBITDA ratio of about 2.5 times. Moreover, Toll had $250 million in debt coming due in 2020. So this debt sale allowed it to push out that maturity at a modest cost. It now doesn't have any material maturities until 2022.

TOL Chart

TOL data by YCharts.

All in all, the debt sale gave Toll Brothers some important breathing room. That was very good news for the homebuilder and its stock and helps to explain the monthly outperformance.

Now what

Although the debt sale was a notable event for Toll Brothers, investors shouldn't get too caught up in the advance. Some bigger-picture issues must be addressed, not least of which is that homebuilding is a cyclical industry and is highly economically sensitive. With the current expansion among the longest on record, investors should be thinking about the very real possibility of a recession sooner rather than later when considering buying stock in any homebuilder today. And while Toll Brothers' debt sale should make it easier to survive the next economic downturn, it doesn't change the fact that it has a more leveraged balance sheet than some of its peers.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Toll Brothers, Inc. Stock Quote
Toll Brothers, Inc.
TOL
$50.04 (1.11%) $0.55

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
400%
 
S&P 500 Returns
128%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/13/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.