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Can Toll Brothers Beat the Californian Weakness in 2016?

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On May 27, we issued an updated research report on Toll Brothers Inc. (TOL - Free Report) .

On May 24, 2016, Toll Brothers reported better-than-expected results in the second quarter of fiscal 2016. Fiscal second-quarter 2016 adjusted earnings of 51 cents per share outperformed the Zacks Consensus Estimate of 48 cents by 6.25% and rose 37.8% year over year driven by higher revenues and gross margin. Revenues of $1.12 billion in the quarter surpassed the Zacks Consensus Estimate of $1.08 billion by 3.4%, and increased 31% year over year driven by higher average selling prices (ASPs) and home deliveries.

The number and value of net orders was modest during the quarter owing to a decline in the number of homes signed in the California region due to lack of inventory for sale and higher  prices.  

However, this Zacks Rank #3 (Hold) company raised its top-line guidance for 2016. The guidance ranges for total revenue, deliveries and ASPs were raised.

Toll Brothers expects revenues between $4.76 billion and $5.36 billion in fiscal 2016, higher than the prior expectation of $4.6 billion and $5.4 billion.
The home deliveries guidance was tightened to the range of 5,800 and 6,300 homes from the prior expected range of 5,600–6,600. The company expects the average price of homes delivered to be between $820,000 and $850,000 compared with the prior expectation of $810,000 to $850,000.

Toll Brothers is optimistic about the performance of the housing sector in the upcoming quarters of 2016. Improving economic environment, higher job numbers, increasing consumer confidence, affordable interest/mortgage rates, rising rentals, rapidly accelarating household formation and a limited supply of inventory, all point to a consistently strong demand momentum in 2016.

On top of it, new home sales soared in April, way ahead of market expectation, per data released on May 24. This pushed up the share price of several construction companies. Shares of homebuilders like PulteGroup, Inc. (PHM - Free Report) , D.R. Horton, Inc. (DHI - Free Report) , KB Home (KBH - Free Report) have appreciated since May 24.  

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