TOLL BROTHERS INC (NYSE:TOL) Fits Peter Lynch’s GARP Strategy with Steady Growth and Strong Fundamentals

Peter Lynch’s investment strategy, described in One Up on Wall Street, centers on finding companies with steady growth at fair prices. His method combines growth and value investing, focusing on solid fundamentals, earnings strength, and controlled debt. The strategy looks for stocks with stable earnings growth (15–30% over five years), a PEG ratio under 1 (showing the stock is priced fairly compared to growth), and strong financial measures like a debt-to-equity ratio below 0.6 and a return on equity above 15%. These factors help spot companies likely to provide lasting returns without paying too much for growth.

TOLL BROTHERS INC (NYSE:TOL) stands out as a potential match for Lynch’s criteria. The homebuilder’s financials meet several important checks:

Why TOL Matches the GARP Approach

1. Steady Growth at Fair Prices

   • TOL’s EPS has increased by 27.96% yearly over the past five years, fitting Lynch’s target range of 15–30%. This shows solid, balanced growth.
   • The PEG ratio (past five years) of 0.33, far below Lynch’s limit of 1, indicates the stock is priced low relative to its growth. This matches Lynch’s focus on avoiding expensive growth stocks.

2. High Profitability and Effective Capital Use

   • A return on equity (ROE) of 17.36% beats Lynch’s 15% standard, showing good use of shareholder funds.
   • The company’s operating margin (16.72%) and profit margin (12.95%) rank among the best in its industry, highlighting strong operations.

3. Prudent Financial Setup

   • TOL’s debt-to-equity ratio of 0.35 is higher than Lynch’s ideal of 0.25 but still shows a cautious approach. The current ratio of 3.54 also points to strong short-term financial health.

4. Industry Role and Cash Flow

   • As a luxury homebuilder, TOL gains from specialized demand and integrated operations (e.g., mortgage, landscaping) that improve efficiency.
   • Positive free cash flow and a share buyback program (mentioned in the fundamental report) fit Lynch’s liking for companies that return value to shareholders.

Fundamental Report Highlights

The full analysis gives TOL a 6/10, praising high profitability and fair pricing but noting slower growth ahead. Key points:

• Profitability: Rated 8/10, with top-tier margins and ROE.
• Valuation: P/E of 9.33 is lower than 68% of peers and the S&P 500 (26.51).
• Health: Strong solvency (Altman-Z score of 3.93) but a low quick ratio (0.29) hints at minor liquidity issues.
• Growth: Past EPS growth (27.96%) exceeds future estimates (9.53%), signaling a slowdown.

Lynch’s Strategy Applied

TOL’s mix of consistent growth, fair pricing, and financial care reflects Lynch’s idea of a “stalwart”—a company growing steadily without taking on too much debt or hype. While housing markets shift, TOL’s focus on luxury and operational control may offer stability.

For investors looking for similar stocks, check the Peter Lynch Strategy screen for more options.

Disclaimer: This article is not investment advice. Do your own research or consult a financial advisor before making decisions.