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On Nov 6, leading U.S. homebuilder, Toll Brothers, Inc. (TOL - Analyst Report) announced a definitive agreement to purchase the homebuilding business of California-based Shapell Industries, Inc. for $1.6 billion; largely boosting its presence in the upscale Californian housing market. On the same day, the company also announced its preliminary results for fourth-quarter fiscal 2013 in a separate press release.

Shapell Acquisition

Shapell is considered as one of the largest privately held home building companies in the California market. Since its launch in 1955, Shapell has established 70,000 homes, a major portion located in the wealthy Northern and Southern Californian markets. Nearly 97.5% of these homes are established in the markets of the San Francisco Bay area, metro Los Angeles, Orange County and Carlsbad, which enjoy strong growth potential.

Following the acquisition, Toll Brothers will gain control over Shapell's entire land portfolio in the California market. It will provide the company an additional 5,200 lots and homes for future sales.Post-acquisition, the company’s existing lots will be around 9,200 (owned and controlled) in California.

The transaction is expected to cost around $1.6 billion to Toll Brothers. Out of it, almost $1.035 billion will be funded with the company’s existing credit facility while the remaining will be funded by debt and equity financing. Toll Brothers intends to complete the acquisition by 2014-end. The transaction is expected to be accretive to Toll Brothers’ earnings in the first year itself.

The takeover is viewed as a significant effort by the company for extending its business in the state, which is both affluent and possesses a strong employment base.

Preliminary Results

In a separate press release, Toll Brothers released preliminary results of revenues, contracts and backlog for fourth-quarter fiscal 2013. The company will report detailed fourth quarter and full-year fiscal 2013 financial results in early December.

The company expects fourth-quarter net revenues to increase 65% year on year to $1.04 billion, which is ahead of the current Zacks Consensus Estimate of $917 million. Revenues in the quarter are expected to be driven by volume growth and higher prices.

The number of homebuilding deliveries is expected to increase 36% year over year to 1,485 units in the fourth quarter, attributable to a rise in demand.

The number of net orders signed will be 1,163 in the fourth quarter of fiscal 2013, up 6% year over year. Value of net orders signed during the quarter is expected to be $839.0 million, up 23% year over year. Order growth will be driven by strong housing demand and increased pricing.

The company’s backlog totaled 3,679 homes in the fourth quarter, up 43% year over year. Potential housing revenues from backlog will grow 57% year over year to $2.63 billion, primarily attributable to hike in prices of backlogs.

Toll Brothers is optimistic about the growing momentum in the housing market and believes housing demand will continue to grow due to supply shortages. With the present slump in demand in the housing market, the company’s aggressive investment in California’s thriving market will help bolster its market share. The housing momentum has slowed down recently due to low home purchases resulting from higher home prices, a rapid rise in mortgage rates and economic uncertainty.

Other Stocks to Consider

Toll Brothers sports a Zacks Rank #3 (Hold). Other stocks in the sector that are performing well and deserve a mention include M/I Homes, Inc. (MHO - Snapshot Report), KB Home (KBH - Analyst Report) and Meritage Homes Corp. (MTH - Snapshot Report). While M/I Homes holds a Zacks Rank #1 (Strong Buy), KB Home and Meritage Homes carry a Zacks Rank #2 (Buy).

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