Toll Brothers is trading at a sizeable discount to its peers and offers a favorable risk-reward outlook for investors looking to play the homebuilder sector, JPMorgan said Tuesday. Analyst Michael Rehaut upgraded the stock to overweight from neutral, noting it trades at a 0.95 current price-to-book ratio and estimates its 2023 multiple at 0.77. The analyst said that’s well below average ratios of 1.31 and 1.14, respectively, for larger-cap peers. Price-to-book ratios measure a company’s value of all its hard assets against its market value. A lower price-to-book ratio is generally seen as more positive by investors. Rehaut added that Toll is “inexpensive relative to our outlook for roughly average gross margins and only moderately below average ROE versus its larger caps in 2023 and 2024.” The upgrade puts Toll Brothers in line with JPMorgan’s other overweight-rated homebuilding names. That includes D. R. Horton , Pultegroup and KB Home . While the group has tumbled at least 25% across the board in 2022, JPMorgan expects them to benefit should the Fed’s tightening cycle come to a halt next year and interest rates decline. “Also, if a mild recession occurs beginning in 2H23, as J.P. Morgan’s Chief Economist Michael Feroli expects, we do not view this as problematic for the sector, as not only is housing already likely experiencing something greater, but we also note that the builders have outperformed during the last two mild recessions,” Rehaut wrote. JPMorgan upped its price target on Toll Brothers to $58 from $47 a share, which implies that shares could gain 29% from Monday’s close. The stock’s tumbled about 38% in this year’s market sell-off. — CNBC’s Michael Bloom contributed reporting
