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Toll Brothers Inc. (TOL - Analyst Report) reported adjusted earnings of 25 cents per share in the first quarter of fiscal 2014, surpassing the Zacks Consensus Estimate of 18 cents by 39%. Adjusted earnings increased significantly from 3 cents in the prior-year quarter on the back of top-line growth.

The company reported revenues of $643.7 million in the first quarter of fiscal 2014, up 52.0% year over year, driven by volume growth and aggressive pricing. Reported revenues however lagged the Zacks Consensus Estimate of $669 million by 3.8%. We believe that the continued weakness in order may have led to the top line miss.   

Homebuilding Revenues and Orders

The number of homebuilding deliveries increased to 928 units in the first quarter of fiscal 2014, up 24% year over year, attributable to a rise in demand and low competition for luxury homes. The average price of homes delivered was $694,000 in the quarter, up 22% year over year. The company ended the quarter with 238 selling communities, up 2.6% from the prior year quarter.

The number of net orders signed was 916 in the first quarter of fiscal 2014, down 6% year over year. Value of net orders signed during the quarter was $701.7 million, up 14% year over year. The company has been witnessing weakness in orders for sometime as the demand for luxury homes have slowed down and the company faces strong comparision in the prior year quarter .

The company’s backlog totaled 3,667 homes as of Jan 31, 2014, up 31% year over year. Potential housing revenues from backlog grew 45% year over year to $2.69 billion, primarily attributable to an increase in prices of backlogs.

Margin Discussion

The company’s homebuilding gross margin (excluding interest and write-downs) grew 100 basis points (bps) to 24.4%, driven by improved pricing and increased volume. However, margins were down 100 bps sequentially.

As a percentage of revenues, selling, general and administrative expenses (excluding the impact of the Shapell acquisition) improved 330 bps to 15.1% due to increased revenues in the quarter. Operating margin improved 480 bps year over year to 4.9% on the back of improved homebuilding gross margin and SG&A ratio.

Fiscal 2014 Outlook

Toll Brothers expects to deliver 5,100 to 5,850 homes in fiscal 2014 compared to the prior expectation of 5,100 to 6,100 homes. The average price is expected to range between $675,000 and $720,000 per home compared with the prior expectation of $670,000 and $720,000. The company expects fiscal 2014 gross margin to improve 175 to 200 bps over 2013 levels. The company continues to expect community count to remain between 250 and 290 in fiscal 2014.

Toll Brothers currently carries a Zacks Rank #3 (Hold). Investors interested in the homebuilding sector can also consider stocks like William Lyon Homes (WLH), Taylor Morrison Home Corporation (TMHC - Snapshot Report) and Lennar Corp. (LEN - Analyst Report). While William Lyon and Taylor Morrison sport a Zacks Rank #1 (Strong Buy), Lennar carries a Zacks Rank #2 (Buy).


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