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We issued an updated research on homebuilding company Toll Brothers Inc. (TOL - Free Report) on Dec 20. The company builds single-family detached and attached home communities, luxury residential and urban communities, principally on the land it develops.
Is Toll Brothers Benefiting from Recovering Housing Market?
Toll Brothers recently posted a mixed performance in fourth-quarter fiscal 2016 wherein the top line beat analysts’ expectations and the bottom line missed the same. The company ended fiscal 2016 with double-digit growth in earnings, revenues, contracts and backlog.
The fourth quarter marked the ninth consecutive quarter of year-over-year growth in contract. Notably, Toll Brothers has been the top performer for order growth in three of the past four quarters. This clearly demonstrates the stability in the luxury housing market.
The company primarily caters to luxury move up buyers, who already possess a residence and are looking to shift to larger homes. These homebuyers are less sensitive to price changes. Toll Brothers enjoys greater pricing power than other homebuilding companies.
At the end of the fiscal fourth quarter, Toll Brothers had a backlog of 4,685 homes, up 15% year over year. Potential housing revenues from backlog grew 14% year over year to $3.98 billion.
Meanwhile, Toll Brothers’ solid land position places it well to meet growing demand, thus lending it a competitive edge over peers who are presently facing land availability constraints.
To boost its footprint further mainly in Western U.S., Toll Brothers has acquired Coleman Homes in Boise, Idaho, that involved the takeover of approximately 1,400 owned lots, 350 controlled lots and the immediate addition of 15 selling communities to first-quarter fiscal 2017 community count. It is important to note that coastal California and other western markets accounted for about 45% in dollars and 36% in units of signed contracts in fiscal 2016.
Concerns
The company’s earnings per share decreased 16.3% year over year in the quarter due to the 210-basis point decline in the gross margin. Moreover, adjusted gross margin in fiscal 2017 is expected in the range of 24.8–25.3% of revenues, reflecting the impact of Coleman Homes acquisition and changes in product deliveries mix.
Again, rising building materials and labor costs are growing concerns for the company. While labor shortages are increasing wages, land prices are rising due to limited availability. This could eat into homebuilders’ margins in the forthcoming quarters as well.
Meanwhile, on Dec 15, the Federal Reserve announced that it is raising the benchmark interest rate by a quarter percentage point to the range of 0.50% to 0.75% (current range 0.25% to 0.50%). This marks the first interest rate hike in 2016 and the second since the 2008-2009 financial crisis after the raise at the end of 2015.
With the Fed announcing a hike in the benchmark Federal Funds target rate, mortgage rates will probably rise further in 2017 or after that. High mortgage rates dilute the demand for new homes as mortgage loans become expensive. This lowers purchasing power of the buyers and hurts volumes, revenues and profits of homebuilders.
Notably, Toll Brothers’ shares lost 5% year to date, compared to the 3.5% decline for the Zacks categorized Building-Residential/Commercial industry. Estimates have also declined slightly. Going forward, rising costs could weigh on the company's margins and also dent its share price.
Zacks Rank & Key Picks 202005 Toll Brothers has a Zacks Rank #3 (Hold).
Better-ranked stocks in the sector include Beazer Homes USA, Inc. (BZH - Free Report) , Hovnanian Enterprises Inc. (HOV - Free Report) and KB Home (KBH - Free Report) .
Full-year 2017 revenues for Beazer Homes are expected to increase 5%.
Hovnanian stock is likely to witness 28.6% growth in fiscal 2017 earnings.
KB Home’s full-year 2016 earnings are expected to rise 35.3%.
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Toll Brothers Q4 Results Mixed, Rate Hike Raises Concern
We issued an updated research on homebuilding company Toll Brothers Inc. (TOL - Free Report) on Dec 20. The company builds single-family detached and attached home communities, luxury residential and urban communities, principally on the land it develops.
Is Toll Brothers Benefiting from Recovering Housing Market?
Toll Brothers recently posted a mixed performance in fourth-quarter fiscal 2016 wherein the top line beat analysts’ expectations and the bottom line missed the same. The company ended fiscal 2016 with double-digit growth in earnings, revenues, contracts and backlog.
The fourth quarter marked the ninth consecutive quarter of year-over-year growth in contract. Notably, Toll Brothers has been the top performer for order growth in three of the past four quarters. This clearly demonstrates the stability in the luxury housing market.
The company primarily caters to luxury move up buyers, who already possess a residence and are looking to shift to larger homes. These homebuyers are less sensitive to price changes. Toll Brothers enjoys greater pricing power than other homebuilding companies.
At the end of the fiscal fourth quarter, Toll Brothers had a backlog of 4,685 homes, up 15% year over year. Potential housing revenues from backlog grew 14% year over year to $3.98 billion.
Meanwhile, Toll Brothers’ solid land position places it well to meet growing demand, thus lending it a competitive edge over peers who are presently facing land availability constraints.
To boost its footprint further mainly in Western U.S., Toll Brothers has acquired Coleman Homes in Boise, Idaho, that involved the takeover of approximately 1,400 owned lots, 350 controlled lots and the immediate addition of 15 selling communities to first-quarter fiscal 2017 community count. It is important to note that coastal California and other western markets accounted for about 45% in dollars and 36% in units of signed contracts in fiscal 2016.
Concerns
The company’s earnings per share decreased 16.3% year over year in the quarter due to the 210-basis point decline in the gross margin. Moreover, adjusted gross margin in fiscal 2017 is expected in the range of 24.8–25.3% of revenues, reflecting the impact of Coleman Homes acquisition and changes in product deliveries mix.
Again, rising building materials and labor costs are growing concerns for the company. While labor shortages are increasing wages, land prices are rising due to limited availability. This could eat into homebuilders’ margins in the forthcoming quarters as well.
Meanwhile, on Dec 15, the Federal Reserve announced that it is raising the benchmark interest rate by a quarter percentage point to the range of 0.50% to 0.75% (current range 0.25% to 0.50%). This marks the first interest rate hike in 2016 and the second since the 2008-2009 financial crisis after the raise at the end of 2015.
With the Fed announcing a hike in the benchmark Federal Funds target rate, mortgage rates will probably rise further in 2017 or after that. High mortgage rates dilute the demand for new homes as mortgage loans become expensive. This lowers purchasing power of the buyers and hurts volumes, revenues and profits of homebuilders.
Notably, Toll Brothers’ shares lost 5% year to date, compared to the 3.5% decline for the Zacks categorized Building-Residential/Commercial industry. Estimates have also declined slightly. Going forward, rising costs could weigh on the company's margins and also dent its share price.
Zacks Rank & Key Picks
202005
Toll Brothers has a Zacks Rank #3 (Hold).
Better-ranked stocks in the sector include Beazer Homes USA, Inc. (BZH - Free Report) , Hovnanian Enterprises Inc. (HOV - Free Report) and KB Home (KBH - Free Report) .
All the three stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Full-year 2017 revenues for Beazer Homes are expected to increase 5%.
Hovnanian stock is likely to witness 28.6% growth in fiscal 2017 earnings.
KB Home’s full-year 2016 earnings are expected to rise 35.3%.
"Zacks’ Best Private Investment Ideas
In addition to the recommendations that are available to the public on our website, how would you like to follow all Zacks' private buys and sells in real time?
Our experts cover all kinds of trades… from value to momentum . . . from stocks under $10 to ETF and option moves . . . from stocks that corporate insiders are buying up to companies that are about to report positive earnings surprises. You can even look inside exclusive portfolios that are normally closed to new investors. Starting today, for the next month, you can have unrestricted access. Click here for Zacks' private trades >>"