Toll Brothers Beats EPS Estimate

Toll Brothers, Inc (TOL - Snapshot Report) reported earnings of 9 cents per diluted share in the second quarter of fiscal 2012, versus loss of 6 cents per diluted share in the second quarter of fiscal 2011. The year-over-year surge in earnings were driven by strong sales and cost saving strategies adopted by the company during the rough times.

The company’s EPS surpassed the Zacks Consensus Estimate of 4 cents per diluted share in the second quarter fiscal 2012.

The company’s EPS, inclusive of the tax benefit, was 10 cents in the second quarter of fiscal 2012 compared with 12 cents in the year-ago period. The tax benefit in the reported quarter of fiscal 2012 was $1.2 million, versus $10.7 million year over year.

Revenue

The company reported revenue of $373.7 million in the second quarter of fiscal 2012, up 17% y/y. The revenue was below the Zacks Consensus Estimate of $379 million for the quarter.

The number of homes delivered increased to 671 units in the second quarter, up 14% y/y. The year-over-year growth was due to the rise in demand and low competition for the luxury products offered by the company.

The net worth of the contracts signed by the company during the quarter is $754.7 million, up 51% y/y. The number of contracts signed in the quarter was 1,290 units, up 47% y/y.

The average price of net signed contracts was $585,000 in the second quarter of fiscal 2012, up 2.6% y/y.

In the reported quarter, the company reported backlog of $1.5 billion (up 49% y/y) and 2,403 units (up 37% y/y).

Quarter highlights

The company’s gross margin (excluding interest and write-downs) increased 23.2% in the reported quarter versus 23.0 % in the year-ago quarter. The company reported pre-tax income (excluding write-downs) of $16.1 million in second quarter fiscal 2012, significantly up from $1 million in second quarter fiscal 2011.

The company reported 230 selling communities in the quarter, up from 203 communities y/y. The cancellation rate of the company reduced to 2.4% in the quarter significantly down from 6.2% in the first quarter fiscal 2012 and 5.7% y/y.

The company reported $927 million of cash and marketable securities as of April 30, 2012, significantly down from $1.25 billion as of April 30, 2011. On April 30, 2012, the company had $819 million available under its $885 million, 12-bank credit facility, which matures on October 2014. The company posted a net debt-to-capital ratio of 26.9% as of April 30, 2012, up from 13.6% as of April 30, 2011.

Outlook

Toll Brothers believes that community count will be within the range of 230 and 245 by the end of fiscal 2012, which is lower than the previous guidance, owing to the sell out of some communities due to stronger demand. The company expects to deliver 2,700 to 3,200 homes in fiscal 2012. The average price is expected to be within the range of $560,000 to $580,000 per home for the remaining quarters of fiscal 2012. In fiscal 2012, the company expects to deliver 10% more homes in the fourth quarter as compared to the third quarter. The company is focused on raising the quality and the luxury quotient of the products and hopes to benefit from it.

Peer Comparison

Lennar Corporation (LEN - Analyst Report) posted revenue of $724.9 million in first quarter of 2012, up 30% y/y. Adjusted EPS in the first quarter of 2012 was 8 cents per share, versus a loss of 5 cents per share in first quarter of 2011.

The Zacks Consensus Estimate for Lennar Corporation stands at 18 cents per diluted share in the second quarter 2012. The company carries the Zacks #2 Rank in the near term (Buy rating).

Our Take

We feel that the company’s performance is encouraging and it can use the opportunities when the market recovers further. The company’s focus on raising the quality and the luxury quotient of the products (thus raising the average price of the homes) and reducing cost seems to be paying off.

Toll Brothers presently retains a Zacks #3 Rank, which translates into a short term Hold rating.

Toll Brothers, Inc. is one of the leading homebuilders in United States. The company offers luxury residential communities; single family attached and detached homes and urban communities. The company caters to 20 states in the United States.