Toll Brothers, Inc. (TOL) stock intrinsic value fair value estimate & owner earnings analysis

Toll Brothers builds and sells luxury and move-up homes in 24 states and Washington, D.C. In fiscal 2025 (year ended October 31) it delivered 11,292 homes from 556 communities, with revenue of $10.97 billion and net income of $1.35 billion. It owns or controls about 76,100 home sites (33,000 owned, 43,100 under option), roughly six to seven years of current deliveries, and was selling from 446 communities at year-end. It also runs its own mortgage, title and lumber and component businesses, and in September 2025 announced it will exit its for-rent apartment business over time. How we measured earnings. We use owner earnings: operating cash flow, less the swings in working capital, less stock compensation, less the part of capital spending needed just to stay in business. For a homebuilder the main working-capital item is inventory (land and homes under construction), which absorbed $521 million of cash in fiscal 2025 and $576 million in fiscal 2024. We leave those swings out of earnings, and to stay consistent we credit no volume growth anywhere, because growth is what that inventory spending buys. Non-cash charges, including $100 million of inventory impairments and write-offs in fiscal 2025, are added back. On this basis owner earnings were $1.57 billion in fiscal 2025, down about 4% from $1.63 billion in fiscal 2024 (which included $124 million of after-tax profit from one northern Virginia land sale), and up from $0.90 billion in fiscal 2021. Toll capitalizes nearly all of its interest into inventory, so to value the business before its lenders we add back about $133 million a year of interest incurred; that gives business cash flow of $1.71 billion in fiscal 2025 and a median of $1.66 billion across fiscal 2021 to 2025. We use that five-year window because Toll's current size, margins and balance sheet date from about 2021; owner earnings in fiscal 2016 to 2020 were $0.38 to $0.77 billion and describe a smaller, lower-margin company. The window contains no real housing downturn, so the downturn is carried in the bear case, and a modest one in the base case. Net cash put into joint ventures (about $228 million in fiscal 2025) is not part of owner earnings; we treat it as growth investment and credit no growth from it. Where earnings are heading. Fiscal 2026 is weaker. Nine-month net income was $752 million against $900 million a year earlier and operating income was $925 million against $1.16 billion. Net income fell 26% in the second quarter and 24% in the third (the first quarter rose). Backlog at October 31, 2025 was $5.49 billion (4,647 homes), 15% below a year earlier; fiscal 2025 contracts fell 2% in dollars even though operating communities rose 9%, and management cited affordability pressure and higher incentives. Two quarters of decline and a smaller backlog are enough to set our base level below the five-year median, at $1.35 billion a year of business cash flow, about 21% below fiscal 2025. Owner earnings actually fell about 4% in fiscal 2025, and the base case starts year one roughly 21% lower, so it does not assume the slowdown reverses. A check on the level: distributions from joint ventures averaged $61 million a year over fiscal 2021 to 2025, about 4% of owner earnings, so the planned apartment exit does not threaten it. Base case: $1.35 billion a year for three years; then a two-year slowdown like the one Toll went through between fiscal 2018 and 2020, when owner earnings fell 26% (from $771 million to $569 million) on flat revenue near $7.1 billion, taking cash flow to $1.0 billion; back to $1.35 billion for years six to ten; and about $1.28 billion a year thereafter, which assumes a similar slowdown once a decade. The business has produced positive owner earnings in every one of the ten years examined. The business is worth about $21.3 billion, it owes $1.5 billion net, leaving $19.8 billion, or $209 a share. We credited no growth: the 9% rise in communities has not yet lifted contracts, and buybacks and apartment-exit proceeds are not secured earnings. Bear case: the company's own filing refers to a 2006 to 2011 housing downturn in which it took significant inventory impairments. In fiscal 2012, still near the bottom, revenue was $1.88 billion (17% of today's) and pre-tax income $113 million. The bear case runs cash flow at $1.10 billion, $0.60 billion, then $0.25 billion in years three and four (about 15% of today's), recovering to $0.5 billion, $0.8 billion, and $1.0 billion a year from year seven (about where Toll stood in fiscal 2021, the first year of its current model; revenue rebuilt from $2.67 billion in fiscal 2013 to $10.97 billion in fiscal 2025), then $0.95 billion a year, allowing for another cycle. The business is worth about $14.2 billion, owes $1.5 billion, leaving $12.7 billion, or $134 a share. Cash flow stays above the roughly $130 million interest bill in every year. Notes of $450 million (March 2027) and $400 million (February 2028) mature in the first two years, against $1.06 billion of cash at July 31, 2026 and a $2.35 billion revolving credit line that was undrawn at last year-end. The bank facilities carry a maximum leverage ratio and a minimum tangible net worth covenant; large inventory write-downs in a bust are how these could bind, and we do not model that. Bull case: the dip proves shallow. Cash flow recovers from $1.35 billion to $1.55 billion and then $1.7 billion from year three, which Toll has already delivered in three straight years (fiscal 2023 to 2025: $1.66, $1.76 and $1.71 billion), helped by 446 selling communities and 76,100 home sites in hand, with no downturn in the ten years and $1.6 billion a year thereafter. The business is worth about $27.1 billion, owes $1.5 billion, leaving $25.5 billion, or $271 a share. Debt. We deducted $1.74 billion of senior notes (4.875% due 2027, 4.35% due 2028, 3.80% due 2029, 5.60% due 2035), the $650 million term loan due February 2030 and about $0.25 billion of other loans, less $1.06 billion of cash, for $1.58 billion, then lowered it by about $48 million because the 2027 to 2029 notes carry rates between 3.8% and 4.9%. The mortgage subsidiary's warehouse borrowing is treated as operating funding of a lender and is not deducted. Shares used: 94.4 million diluted. The margin-of-safety price. We are fairly sure of the ten-year earnings record, but less sure of the next few years: the level is falling now, and the gap between our bear and bull cases is wide because housing earnings swing widely. The worst plausible outcome is a repeat of 2006 to 2011. Toll's structure should survive it, with debt at about a quarter of capital, cash, staggered maturities and $10.7 billion of inventory, but an extended bust with heavy write-downs could press the covenants or the 43,100 optioned home sites. If the level stays near $1.0 billion instead of $1.35 billion we estimate about $151 a share; if a bust is followed by recovery to only $0.6 billion a year (fiscal 2019 to 2020 levels), about $85. The price assumes a holding period of about four years. For reference, the company paid $97 million in dividends and repurchased $651 million of stock in fiscal 2025. The margin-of-safety price is $80: from that price the bear path, worth roughly $147 a share in four years plus about $18 a share of cash generated meanwhile, implies about 20% a year, the base path implies well above that, and $80 sits below book equity of about $90 a share, mostly homes and land carried at cost. The weak-recovery outcome above is the one that would imply a loss from that price. Our earlier September 2026 estimate used a different basis and is not comparable.