Toll Brothers: Upgrading to Overweight on Relative Value - Prefer Luxury to Entry-Level Homebuilders

We are upgrading Toll Brothers (TOL) to Overweight from Neutral. While we remain cautious on homebuilders in an elevated rate environment, we believe TOL's higher price point product caters to a less rate-sensitive buyer and note that we have seen relative resilience in this cohort of the market. We believe TOL should trade at a premium vs entry-level-focused LEN and tighter to lower-rated entry-level-focused MTH. While DHI carries meaningfully more overall scale nationwide than TOL, our increased concern around entry-level demand in a higher-for-longer rate environment drives our view that TOL is poised to compress against higher-rated homebuilder peers. PHM has a bit more of a balanced product mix, and we believe TOL should trade 5-10 bp wide to PHM and flat to 5 bp wide to DHI as a result, representing ~10bp of upside from current levels in our view. In a sector filled with plenty of negative sentiment, we expect resilient fundamentals at TOL to continue driving outperformance withi