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Toll Brothers (TOL) Up 11.2% Since Last Earnings Report: Can It Continue?

Zacks Equity Research

A month has gone by since the last earnings report for Toll Brothers (TOL). Shares have added about 11.2% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Toll Brothers due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Toll Brothers (TOL) Q3 Earnings Top, Orders Fall

Toll Brothers, Inc.'s third-quarter fiscal 2019 earnings earnings and revenues topped the respective Zacks Consensus Estimate. However, both the metrics decreased on a year-over-year basis, thanks to soft demand.

Although declining mortgage rates, a limited supply of homes and solid job market have helped the company to increase prices even in a weak demand environment, lower orders are a pressing concern.

Earnings & Revenue Discussion

The country's leading luxury homebuilder reported earnings of $1.00 per share in the quarter under review, surpassing the Zacks Consensus Estimate of 82 cents by 22%. However, the said figure dropped 20.6% from the year-ago figure of $1.26 as a result of lower revenues and margins.

Consolidated revenues of $1.77 billion topped the consensus mark of $1.7 billion by 4.1%. The reported figure, however, decreased 7.7% year over year due to lower deliveries, partly offset by higher average selling prices.

Segment Detail

Toll Brothers operates under two reportable segments, namely Traditional Home Building and Urban Infill ("City Living").

Revenues from Traditional Home Building totaled $1.68 billion, up 9.6% year over year, and that of City Living increased 42.1% to $71.9 million during the quarter.

Inside the Headline Numbers

Consolidated homebuilding revenues decreased 7.7% year over year to $1.77 billion. Homebuilding deliveries during the quarter declined 11.2% year over year to 1,994 units. Deliveries decreased in all the regions served by the company, except South. The decline was fully offset by a year-over-year increase in deliveries in Citi Living to 40 units from 29 units a year ago.

The average price of homes delivered was $881,200 in the quarter, up 3.4% from the year-ago level of $851,900.

The number of net signed contracts or orders during the reported quarter was 2,241 units, down 3% year over year. The value of net signed contracts was $1.87 billion, reflecting a decrease of 8% from the year-ago quarter.

At the end of the fiscal third quarter, Toll Brothers had a backlog of 6,839 homes, representing a 4% year-over-year decline. Moreover, potential revenues from backlog declined 10% year over year to $5.84 billion. The average price of homes in backlog totaled $854,500, down from $912,600 at the end of the comparable period of fiscal 2018.

Cancellation rate during the reported quarter was 6.5% compared with 5.4% in the prior-year period.

Margins

The company's home sales adjusted gross margin was 23.1%, contracting 120 basis points (bps) in the quarter.

SG&A expenses, as a percentage of home sales revenues, came in at 10.6%, up 150 bps from the year-ago quarter. Operating margin of 9.7% was down 230 bps in the quarter.

Financials

Toll Brothers had $836.3 million cash and cash equivalents as of Jul 31, 2019 compared with $1.18 billion at fiscal 2018-end.

During the fiscal third quarter, the company repurchased approximately 3.98 million shares, at an average price of $35.74 per share, for a total purchase price of about $142.2 million.

Fiscal 2019 Guidance

For full-year fiscal 2019, home deliveries are anticipated in the range of 7,800-8,100 units (versus 8,265 units reported in fiscal 2018) at an average price of $860,000-$880,000 (the year-ago figure was $864,300).

Toll Brothers expects adjusted home sales gross margin of about 23%, down from 23.7% recorded in the year-ago period. SG&A expenses, as a percentage of home sales revenues, for full-year fiscal 2019 are projected to be nearly 10.4% (compared with 9.6% in fiscal 2018).

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month. The consensus estimate has shifted -8.34% due to these changes.

VGM Scores

At this time, Toll Brothers has a subpar Growth Score of D, however its Momentum Score is doing a lot better with an A. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Toll Brothers has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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