Homebuilder Toll Brothers (TOL) reports earnings Monday after the close. Lennar (LEN) will report on Wednesday after the close. I’ll describe my set-up going into the results. Since the beginning of Q4 2024, the homebuilding industry has underperformed the broad market materially. For example, of the eleven building products companies reported this quarter, only four have outperformed the S & P from the day before their earnings release through this past Friday. As a group, they’ve underperformed the S & P 500 by about 5.1% on average. Of the seventeen homebuilding companies that have reported, only three have outperformed the broad market, and as a group, they’ve underperformed the S & P by 5.2%. Is the group’s underperformance a harbinger for TOL and LEN? In theory, both should benefit from housing demand, but they serve very different demographics. Comparing the respective segments these two builders occupy to homebuilders that have already reported this quarter may provide some insights into which of the two is better positioned. Interestingly, none of the three homebuilders that have outperformed since their reported earnings cater to the median home buyer. Taylor Morrison closed on 11,495 homes at an average price of $623,000 in 2023, about 50% higher than the median home price in the United States, and Cavco Industries and Champion Homes sell manufactured, pre-fab, and mobile housing at prices much lower than the $400,000 median home price in the United States. The average post-earnings price change for the ten homebuilders with average selling prices between $350,000 and $560,000, much closer to the median home price, is -9.4%. It suggests that building and selling homes to the average working American is challenging in this environment. Lennar falls right in that range, with an average selling price of $422,000 last quarter. By contrast, Toll Brothers serves a much higher-income group. Although their average closing price fell from $1,071,500 in Q3 2023 to $968,200 in Q3 2024, that is still more than double the median home price in the US. Serving a more affluent clientele may be one of the reasons that TOL has outperformed LEN by 10% over the past seven weeks when the homebuilders first began reporting their Q3 earnings results, outperformance which accounts for the difference in their respective valuations. TOL is trading at 11.3 times forward earnings versus 10.2 times for LEN, a slight premium I believe is justified. TOL LEN mountain 2024-09-30 Toll vs. Lennar this quarter Another premium distinguishing these two homebuilders beyond their home prices and forward PE multiple is the price of options going into their respective earnings releases. The trade Lennar implies a fairly modest earnings-related move of less than 5%, while Toll has an implied move of nearly 7%. The reason? Toll Brothers’ balance sheet carries about $2.9 billion in debt and $900 million in cash, whereas Lennar’s $4.25 billion in cash comfortably exceeds their $2.5 billion in debt. Investors looking to choose between these two homebuilders must decide whether they will prioritize the company’s balance sheet or its customers’ balance sheets. On that score, I fall in favor of Toll Brothers. To provide a bit of a downside buffer in the event it gives back its recent outperformance versus Lennar an option trader could use a calendar call spread risk-reversal. Buying a longer-dated call financed in part through the sale of a nearer-dated strangle, preferably struck at prices beyond the implied move, such as the December/March 141/155/175 illustrated here : Sell Dec. 20 TOL $141 put Buy March 21 TOL $155 call Sell Dec. 20 TOL $170 call DISCLOSURES: (None) All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.