Toll Brothers (TOL): Assessing Valuation and Earnings Momentum in a Divided Market

The real estate development sector remains a barometer for macroeconomic sentiment, and Toll Brothers (TOL), the nation's leading luxury homebuilder, has become a focal point for investors weighing near-term opportunities. As of December 2025, TOL's financial performance and valuation metrics present a mixed picture: robust revenue growth juxtaposed with declining margins, a bearish Zacks Rank, and divergent analyst projections. This analysis evaluates whether TOL's current discount and revised earnings estimates justify a near-term investment, drawing on recent earnings reports, valuation trends, and conflicting analyst outlooks.

Earnings and Revenue Trends: Growth Amid Margin Pressures

Toll Brothers reported Q4 2025 revenue of $3.42 billion, a 2.7% year-over-year increase and a 2.97% beat over the Zacks Consensus Estimate according to Nasdaq. This growth was driven by 3,443 delivered units, exceeding the estimated 3,377, and an average delivered price per unit of $991.60, slightly above expectations as reported by Nasdaq. However, the company's earnings per share (EPS) of $4.58 fell short of the $4.87 Zacks estimate, marking a -5.95% surprise according to Finviz. Year-over-year, EPS declined marginally from $4.63, reflecting tighter profit margins.

Adjusted home sales gross margin is projected to contract 90 basis points to 27% in FY2026, signaling persistent cost pressures according to Yahoo Finance. Meanwhile, operating margin dipped to 16.6% in Q3 2025, down from 18.6% in the prior-year period as reported by StockStory. These trends highlight a critical tension: while top-line growth persists, profitability is under strain, raising questions about the sustainability of TOL's revenue momentum.

Zacks Rank and Analyst Projections: A Tale of Two Outlooks

Zacks Research has assigned TOL a Rank 4 (Strong Sell) as of December 2025, citing downward revisions to earnings estimates and concerns about near-term underperformance according to Zacks. The firm slashed its FY2026 EPS forecast to $12.53 from $13.72, a 8.5% reduction, and similarly cut quarterly estimates for 2026–2027 as reported by MarketBeat. This bearish stance contrasts with the broader analyst consensus, which maintains a "Moderate Buy" rating, averaging a $150.36 price target-a 9.03% premium to the December closing price as reported by Zacks.

The divergence in analyst sentiment is stark. While Zacks emphasizes margin compression and demand volatility, other analysts, including Jay McCanless (Wedbush) and Kenneth Zener (Seaport Global), have upheld positive outlooks as reported by TipRanks. Price targets span a wide range ($110–$181), with six "Buy" ratings, five "Hold" ratings, and two "Sell" ratings reported in the past three months as reported by TipRanks. This fragmentation underscores uncertainty about TOL's ability to navigate macroeconomic headwinds, such as rising interest rates and shifting consumer preferences.

Valuation Metrics: Discounted but Not Necessarily Undervalued

TOL's current valuation appears discounted relative to historical averages. The Zacks Rank of #4 (Sell) suggests the stock is expected to lag the broader market, while the average price-to-earnings (P/E) ratio for the S&P 500 Homebuilders Index stands at 12.3x as reported by Zacks. TOL's forward P/E, based on the $13.83 consensus EPS, implies a valuation in line with peers but with elevated risk due to margin pressures.

Backlog metrics further complicate the valuation narrative. TOL's backlog units rose to 4,647 in Q4 2025, up from 4,614 estimated according to Nasdaq, but its total backlog value declined 9.7% year-on-year to $6.38 billion as reported by StockStory. This discrepancy-higher unit counts but lower backlog value-points to a potential softening in average selling prices, which could erode future revenue visibility.

Investment Implications: Buy or Hold?

The decision to invest in TOL hinges on reconciling its revenue resilience with margin vulnerabilities and conflicting analyst projections. On one hand, TOL's ability to consistently exceed unit delivery estimates and grow revenue in a challenging market demonstrates operational strength. On the other, the Zacks Rank and downward earnings revisions signal near-term risks, particularly in a sector sensitive to interest rate fluctuations.

For risk-tolerant investors, the current discount and moderate analyst price targets may present an entry point, especially if macroeconomic conditions stabilize in early 2026. However, the bearish Zacks outlook and margin contraction warrant caution. A "Hold" recommendation seems prudent for now, pending clarity on TOL's ability to stabilize its gross margins and execute its backlog efficiently.

Conclusion

Toll Brothers occupies a precarious position in today's market: a revenue-generating machine with a tarnished profitability profile and a divided analyst community. While its valuation appears reasonable, the risks of margin compression and demand volatility cannot be ignored. Investors should monitor TOL's Q1 2026 earnings report and any further revisions to analyst estimates before committing capital. In a sector where timing is everything, patience may prove more rewarding than haste.