Toll Brothers (TOL)

Homebuilding company Toll Brothers (NYSE:TOL) reported Q3 CY2025 results exceeding the market’s revenue expectations, with sales up 2.7% year on year to $3.42 billion. Its non-GAAP profit of $4.58 per share was 6.1% below analysts’ consensus estimates.

Company Overview

Started by two brothers who started by building and selling just one home in Pennsylvania, today Toll Brothers (NYSE:TOL) is a luxury homebuilder across the United States.

Traditionally, homebuilders have built competitive advantages with economies of scale that lead to advantaged purchasing and brand recognition among consumers. Aesthetic trends have always been important in the space, but more recently, energy efficiency and conservation are driving innovation. However, these companies are still at the whim of the macro, specifically interest rates that heavily impact new and existing home sales. In fact, homebuilders are one of the most cyclical subsectors within industrials.

Competitors of Toll Brothers include D.R. Horton (NYSE:DHI), Lennar (NYSE:LEN), and PulteGroup (NYSE:PHM).

A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Over the last five years, Toll Brothers grew its sales at a solid 9.2% compounded annual growth rate. Its growth beat the average industrials company and shows its offerings resonate with customers.

We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Toll Brothers’s recent performance shows its demand has slowed as its annualized revenue growth of 4.7% over the last two years was below its five-year trend.

Toll Brothers also reports its backlog, or the value of its outstanding orders that have not yet been executed or delivered. Toll Brothers’s backlog reached $5.5 billion in the latest quarter and averaged 8.5% year-on-year declines over the last two years. Because this number is lower than its revenue growth, we can see the company hasn’t secured enough new orders to maintain its growth rate in the future.

This quarter, Toll Brothers reported modest year-on-year revenue growth of 2.7% but beat Wall Street’s estimates by 3.2%.

Looking ahead, sell-side analysts expect revenue to decline by 1.9% over the next 12 months, a deceleration versus the last two years. This projection is underwhelming and indicates its products and services will face some demand challenges.

All else equal, we prefer higher gross margins because they make it easier to generate more operating profits and indicate that a company commands pricing power by offering more differentiated products.

Toll Brothers has bad unit economics for an industrials company, giving it less room to reinvest and develop new offerings. As you can see below, it averaged a 25.7% gross margin over the last five years. That means Toll Brothers paid its suppliers a lot of money ($74.29 for every $100 in revenue) to run its business.

This quarter, Toll Brothers’s gross profit margin was 24.8%, down 2.4 percentage points year on year. Toll Brothers’s full-year margin has also been trending down over the past 12 months, decreasing by 2.9 percentage points. If this move continues, it could suggest a more competitive environment with some pressure to lower prices and higher input costs (such as raw materials and manufacturing expenses).

Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

Toll Brothers has been a well-oiled machine over the last five years. It demonstrated elite profitability for an industrials business, boasting an average operating margin of 16.2%. This result was particularly impressive because of its low gross margin, which is mostly a factor of what it sells and takes huge shifts to move meaningfully. Companies have more control over their operating margins, and it’s a show of well-managed operations if they’re high when gross margins are low.

Looking at the trend in its profitability, Toll Brothers’s operating margin rose by 4.2 percentage points over the last five years, as its sales growth gave it operating leverage. Its expansion was impressive, especially when considering most Home Builders peers saw their margins plummet.

In Q3, Toll Brothers generated an operating margin profit margin of 16.5%, down 2.6 percentage points year on year. Since Toll Brothers’s operating margin decreased more than its gross margin, we can assume it was less efficient because expenses such as marketing, R&D, and administrative overhead increased.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Toll Brothers’s EPS grew at an astounding 31.5% compounded annual growth rate over the last five years, higher than its 9.2% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

We can take a deeper look into Toll Brothers’s earnings quality to better understand the drivers of its performance. As we mentioned earlier, Toll Brothers’s operating margin declined this quarter but expanded by 4.2 percentage points over the last five years. Its share count also shrank by 24.3%, and these factors together are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.

Like with revenue, we analyze EPS over a shorter period to see if we are missing a change in the business.

For Toll Brothers, its two-year annual EPS growth of 4.2% was lower than its five-year trend. We hope its growth can accelerate in the future.

In Q3, Toll Brothers reported adjusted EPS of $4.58, down from $4.63 in the same quarter last year. This print missed analysts’ estimates, but we care more about long-term adjusted EPS growth than short-term movements. Over the next 12 months, Wall Street expects Toll Brothers’s full-year EPS of $13.56 to stay about the same.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Toll Brothers has shown impressive cash profitability, enabling it to ride out cyclical downturns more easily while maintaining its investments in new and existing offerings. The company’s free cash flow margin averaged 9.6% over the last five years, better than the broader industrials sector.

Taking a step back, we can see that Toll Brothers’s margin dropped by 3.6 percentage points during that time. If its declines continue, it could signal increasing investment needs and capital intensity.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Although Toll Brothers hasn’t been the highest-quality company lately, it historically found a few growth initiatives that worked out well. Its five-year average ROIC was 14.3%, impressive for an industrials business.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Fortunately, Toll Brothers’s ROIC averaged 3.1 percentage point increases over the last few years. This is a good sign, and we hope the company can keep improving.

We enjoyed seeing Toll Brothers beat analysts’ revenue expectations this quarter. On the other hand, its EPS missed. Overall, this quarter could have been better. The stock traded down 3% to $132.77 immediately after reporting.

Updated: December 8, 2025 at 10:21 PM EST

Are you wondering whether to buy Toll Brothers or pass? We urge investors to not only consider the latest earnings results but also longer-term business quality and valuation as well.

Toll Brothers isn’t a terrible business, but it doesn’t pass our quality test. Although its revenue growth was solid over the last five years, it’s expected to deteriorate over the next 12 months and its backlog declined. And while the company’s astounding EPS growth over the last five years shows its profits are trickling down to shareholders, the downside is its projected EPS for the next year is lacking.

Toll Brothers’s P/E ratio based on the next 12 months is 10.2x. This valuation multiple is fair, but we don’t have much faith in the company. We're fairly confident there are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $152.40 on the company (compared to the current share price of $131.27).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.