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Why Is Toll Brothers (TOL) Down 5.3% Since Last Earnings Report?

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A month has gone by since the last earnings report for Toll Brothers (TOL - Free Report) . Shares have lost about 5.3% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Toll Brothers due for a breakout? 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 Q3 Earnings & Revenues Beat Estimates

The country’s leading luxury homes builder reported earnings of $1.26 per share in the fiscal third quarter, beating the Zacks Consensus Estimate of $1.03 by 22.3%. The reported figure also grew 44.8% from the year-ago profit level of 87 cents.

The company reported revenues of $1.91 billion in the quarter, beating the consensus mark of $1.81 billion. The reported figure also increased by an impressive 27% year over year, reflecting healthy new home industry and its unique position in the luxury market.

Segment Detail

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

Traditional Home Building revenues during the quarter totaled $1.86 billion, up 32.7% year over year, while City Living revenues of $50.6 million decreased 48.7% from $98.7 million a year ago.

Inside the Headline Numbers

Consolidated homebuilding deliveries increased 18% year over year to 2,246 units in the quarter. Deliveries increased across all the regions (barring Citi Living), i.e., North, Mid-Atlantic, South, West, California. Deliveries at Citi Living were down 62.8% from the year-ago level.

The average price of homes delivered was $851,900 in the quarter, up 7.6% from the year-ago level of $791,400.

The number of net signed contracts was 2,316 units in the quarter, up 7.1% year over year. Value of net signed contracts was $2.03 billion, reflecting an increase of 12% from the year-ago quarter. This marks the 16th consecutive quarter of year-over-year growth in contracts.

At the end of fiscal third quarter, Toll Brothers had a backlog of 7,100 homes, up 13% from the prior-year quarter. Potential housing revenues from backlog grew 22% year over year to $6.48 billion (the highest third-quarter backlog in 12 years). The average price of backlog was $912,600, up 8% from $845,100 in the prior-year quarter.

Margins

The company’s homebuilding adjusted gross margin contracted 70 basis points (bps) to 24.3% in the quarter under review. The downside was due to higher input costs.

As a percentage of revenues, SG&A expenses improved 120 bps to 9.1% in the quarter.

Operating margin of 12% expanded 20 bps in the quarter.

Financials

Toll Brothers had $522.2 million in cash as of Jul 31, 2018 compared with $712.8 million on Oct 31, 2017.

During the fiscal third quarter, the company repurchased roughly 3.7 million shares of common stock at an average cost of $37.24 per share, for a total purchase price of approximately $136 million.

Fiscal Fourth-Quarter Guidance

The company expects home deliveries between 2,550 units and 2,850 units (versus 2,424 units delivered in the prior-year quarter) at an average price of $840,000-$870,000 (versus $836,600 a year ago).

Adjusted gross margin in the quarter is expected to be approximately 24.8% compared with 25.3% in the year-ago quarter.

SG&A expenses are estimated at approximately 8.1% of the revenues (compared with 8.3% a year ago).

Fiscal 2018 Guidance

Home deliveries are now anticipated in the range of 8,100-8,400 units (versus 8,000-8,500 units expected earlier) at an average price of $835,000-$860,000 (prior expectation was within $830,000-$860,000).

The company narrowed its earlier guided range for total revenues. Currently, it expects revenues between $6.76 billion and $7.22 billion versus $6.64-$7.31 billion expected earlier. In fiscal 2017, the company had reported revenues of $5.82 billion.

Toll Brothers expects adjusted gross margin of about 24%, consistent with the mid-point of its earlier guided range of 23.75-24.25%. This indicates an improvement from 24.8% reported in fiscal 2017. SG&A expenses are estimated at approximately 9.8% of the revenues.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

At this time, Toll Brothers has a great Growth Score of A, a grade with the same score on the momentum front. Following the exact same course, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. 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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