Where is Toll Brothers (TOL) stock headed in times of crisis?

The market was surprised last month when home construction company Toll Brothers (NYSE: TOL) reported weaker-than expected first-quarter results, at a time when the US housing market is at its best in nearly a decade. The dismal outcome took a toll on the company’s stock, amid growing fears that the covid-19 outbreak might trigger a recession.

Hold It?

Analysts are divided in their recommendations for the stock, and the consensus rating has been hold over the last three months. That makes sense considering the uncertainty prevailing in the market. Going by the current trend, there is nothing much for the shareholders to cheer about. While the prospects of the Pennsylvania-based company returning to the pre-crisis levels in the long term are bright, it will depend on how the larger market performs in the coming months.

The good news is that orders recovered from last year’s lows and surpassed estimates in the most recent quarter, reflecting the recent uptick in the housing market and the positive macroeconomic conditions prevailed in the final months of 2019.

Pricing Power

Going forward, the favorable pricing environment should help the company drive margin growth and enhance profitability once the market stabilizes. The management will likely continue with its pricing initiatives, considering the continuing weakness in profitability.

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It is certain that the coronavirus crisis will have a negative impact on the company’s current quarter and probably beyond that, which is also the case with almost all Wall Street firms. But, Toll Brothers’ dominance in the luxury home-building market is undeniable, and currently there are many projects in the pipeline. That, combined with the company’s strong fundamentals and decent cash position, will help it overcome the present setback and get back on track when conditions are favorable.

Weak start to FY20

Earnings nearly halved to $0.41 per share in the first quarter on revenues of $1.33 billion, which was slightly below last year’s levels. The results also missed Wall Street’s prediction. Though the management attributed the slump to delayed deliveries, especially for a California project, the weak outlook added to the market’s concerns.

Toll Brothers’ stock closed the last trading session at the lowest level in nearly nine years, thanks to the growing pessimism among investors over the epidemic. The stock has been in free fall since mid-February – when it traded at a two-year high – and lost about 67% since then.