Toll Brothers (TOL) Down 1.4% Since Last Earnings Report: Can It Recover?

A month has passed since Toll Brothers’ (TOL) last earnings report. Shares have lost about 1.4% in that time, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Toll Brothers due for a breakout? Before we dive into the recent reaction from investors and analysts, let’s take a quick look at the company’s most recent earnings report in order to get a better handle on the important factors influencing the situation.

Toll Brothers’ second quarter results are lower, revenues are better, guidance is up

Toll Brothers reported mixed results for the second quarter of fiscal 2024 (ended April 30, 2024), in which the company’s earnings missed the Zacks Consensus Estimate but revenues were flat. Nevertheless, both revenues and profits increased year-on-year.

Toll Brothers’ financial success in the second quarter was driven by strong demand for new homes, boosted by a strong economy, favorable demographics and a significant housing supply shortage. To meet these market conditions, the company has expanded its price points to include lower-priced luxury homes and increased its offering of specialty homes. These strategies allowed Toll Brothers to increase market share, reduce cycle times, improve inventory turns and better leverage fixed costs, resulting in revenue growth and higher operating margins. Additionally, the capital-intensive land strategy further boosted profits, ensuring the company continues to enjoy attractive returns in the future.

Following encouraging fiscal second-quarter results and an encouraging demand trend, the company revised its full-year revenue and earnings guidance upwards. It currently expects earnings per share (EPS) to be approximately $14.00 in fiscal 2024 (versus prior expectations of $13.25-$13.75) with a return on initial capital of approximately 22%.

Discussion about earnings and revenues

The Fort Washington, Pennsylvania-based homebuilder reported EPS of $3.38, missing the Zacks Consensus Estimate of $4.13 by 18.2% but up 18.6% from earnings. from the previous period of $2.85. The increase is due to higher revenues.

Total revenues (including home, land and other sales) were $2.84 billion, topping the consensus estimate of $2.52 billion by 12.6% and up 13.2% year-over-year. The increase was due to higher deliveries.

Inside the headlines

The company’s total home sales revenue increased 6.3% from the prior-year quarter (well above our forecast of a 1.3% year-over-year decline) to $2.65 billion. The number of completed houses increased by 6% year-on-year (compared to our expectations of a 2% year-on-year decline) to 2,641 apartments. Shipments increased in all geographic regions the company serves, except the North and Mountains. The average price of homes delivered was $1,002,600 in the quarter, up 0.3% from the year-ago level of $999,300.

Moreover, the number of net contracts signed in the quarter under discussion amounted to 3,041 premises, which means an increase of 30% year-on-year. The net value of signed contracts amounted to USD 2.94 billion, an increase of 29%.

At the end of the fiscal second quarter, Toll Brothers had a backlog of 7,093 homes, a 6% year-over-year decline. Potential backlog revenue declined 12% year-over-year to $7.38 billion. The average price of pending homes was $1,040,200, down 5.9% from $1,105,900 a year ago.

The cancellation rate (as a percentage of signed contracts) for the reported quarter was 5.7% compared to 11.5% in the previous year period.

The story continues

Margins

The company’s adjusted home gross margin was 28.2%, down 10 basis points (bps) for the quarter. SG&A expenses as a percentage of home sales revenue were 9%, down 10 basis points from the prior-year quarter.

Financial

At the end of the second fiscal quarter, TOL had $1.03 billion in cash and cash equivalents, compared to $1.3 billion at the end of fiscal 2023. At the end of April 2024, it had $1.7 billion in banking revolving credit facility worth USD 1.9 billion, maturing in February 2028.

Total debt at the end of the fiscal second quarter was $2.84 billion, up from $2.86 billion at the end of fiscal 2023. Debt equity at the end of the fiscal second quarter was 28%, down from 29.6% at the end of the fiscal year 2023.

On March 12, 2024, the company announced a 10% increase in its quarterly cash dividend, raising it to 23 cents per share from 21 cents. The company then paid an increased dividend of 23 cents per share on April 19, 2024 to shareholders of record as of April 5, 2024.

Third quarter fiscal guidance

Toll Brothers expects home deliveries of 2,750-2,850 units (compared to 2,524 units delivered in the prior-year quarter) at an average price of $950,000-960,000 (suggesting a decline from $1,059,100 a year earlier ). It expects the number of communities to be 400 at the end of the period.

Adjusted gross margin on home sales is expected to be 27.7%, down from 29.3% in the year-ago period. SG&A costs are estimated at 9.2% of home sales revenues, up from 8.6% in the same period a year earlier. The company expects the effective tax rate to be 26%.

Raising budget guidance for 2024

Home shipments are now expected to be 10,400-10,800 units in FY2024 (compared to earlier expectations of 10,000-10,500 units). The estimated range reflects an increase from 9,597 units in fiscal year 2023. The number of communities at the end of the period is still expected to be 410.

The average price of completed homes is still expected to be $960,000-$970,000 (compared to previous forecasts of $940,000-$960,000). The range estimate reflects a decrease from the $1,027,900 reported in fiscal year 2023.

Toll Brothers continues to expect adjusted gross margin on home sales to be 28%, compared to 28.7% reported in fiscal 2023. Selling, general and administrative expenses as a percentage of home sales revenue are currently estimated will be 9.6% compared to the previous expectation of 9.8% in fiscal 2024. A year ago, the rate was 9.2%. The company still expects the effective tax rate to be 25.5%.

How have estimates changed since then?

Last month, investors saw a downward trend in new estimates.

VGM results

At this point, Toll Brothers has a solid Growth Score of B, although well behind its Momentum Score of F. However, the stock is rated an A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has a Total VGM Score of B. If you’re not focused on one strategy, this score should interest you.

Perspectives

Estimates for this company are generally on a downward trend, and the magnitude of these revisions indicates a downward shift. Notably, Toll Brothers carries a Zacks Rank #3 (Hold). We expect a linear rate of return on the stock over the next few months.

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