Toll Brothers Inc (NYSE:TOL) Emerges as a Peter Lynch-Style GARP Candidate

The investment philosophy created by Peter Lynch has long been a guide for investors aiming to build wealth through a disciplined, long-term method. Central to this strategy is the idea of "Growth at a Reasonable Price," or GARP, which concentrates on finding companies that show solid, sustainable earnings growth without having excessive valuation premiums. The method highlights fundamental health, requiring companies to be profitable, carry manageable debt, and show efficient use of shareholder capital. By using a systematic screen based on these Lynch principles, investors can find potential candidates that fit this time-tested structure for long-term portfolio building.

Meeting the Lynch Criteria

TOLL BROTHERS INC (NYSE:TOL) appears as a company that fits closely with several key filters of the Peter Lynch screen. The strategy focuses on sustainable growth and reasonable valuation, and Toll Brothers shows these traits through specific financial metrics.

• Sustainable Earnings Growth: Lynch preferred companies growing earnings at a pace that could be maintained, usually between 15% and 30%. Toll Brothers reports a five-year EPS growth rate of 27.96%, which sits comfortably within this target area, pointing to strong but not excessive expansion.
• Attractive Valuation via PEG Ratio: A key part of the Lynch method is the PEG ratio, which adjusts the common P/E ratio for growth. A figure at or below 1.0 indicates a stock may be fairly priced relative to its growth path. Toll Brothers has a PEG ratio of 0.37, much lower than this level, pointing to a potentially attractive valuation when its growth is considered.
• Strong Profitability (ROE): Return on Equity is a vital measure of how efficiently a company creates profits from shareholder equity. Lynch wanted a minimum of 15%. Toll Brothers surpasses this with an ROE of 16.99%, indicating effective management and good profitability.
• Solid Financial Health: The screen requires a Debt-to-Equity ratio below 0.6 to make sure the company is not over-leveraged. Toll Brothers, with a ratio of 0.36, shows a conservative capital structure, depending more on equity than debt. Also, its Current Ratio of 3.72 is much higher than the required 1.0, indicating a strong ability to meet short-term obligations.

Fundamental Analysis Overview

A wider fundamental analysis of Toll Brothers supports its status as a company with clear strengths and some points for review. The company gets an overall fundamental rating of 6 out of 10.

Its most notable strength is in profitability, where it gets a high score of 8. The company shows excellent margins and returns on assets and invested capital, regularly performing better than most of its peers in the Household Durables industry. From a valuation viewpoint, the stock seems fairly priced, with standard Price-to-Earnings ratios trading below both industry and S&P 500 averages.

The analysis does show a mixed financial health picture, with a score of 6. While the company has a strong solvency position, a comfortable debt level, and a high current ratio, its quick ratio is a point of attention, suggesting a possible dependence on inventory to cover the most immediate liabilities. The growth rating of 5 reflects a strong historical record, though analyst forecasts point to a slowing in the speed of future earnings and revenue growth.

Positioning for the Long Term

For investors following the Peter Lynch philosophy, Toll Brothers presents an attractive case. The company works in a sector,luxury homebuilding,that is both understandable and essential, fitting with Lynch's principle of investing in what you know. Its financial metrics directly meet the quantitative filters made to find companies with sustainable growth, fair prices, and sound balance sheets. The good profitability and conservative debt levels provide a buffer against economic cycles, which is vital for a long-term, buy-and-hold strategy. While the slowing in projected growth is a factor to monitor, the company's current valuation and historical performance suggest it is placed as a GARP candidate deserving of more study.

To see other companies that pass this strict investment screen, you can look at the full Peter Lynch Strategy stock screener.

Disclaimer: This article is for informational purposes only and does not constitute financial advice, a recommendation, or an offer or solicitation to buy or sell any securities. The information presented should not be used as the only basis for any investment decision. All investments involve risk, including the possible loss of principal. Past performance is not a guarantee of future results. Readers should do their own research and talk with a qualified financial advisor before making any investment decisions.