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Toll Brothers Exceeds Expectations

LEN TOL

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Toll Brothers, Inc., (TOL - Analyst Report) one of the leading luxury homebuilders in the US, reported earnings of 35 cents per diluted share in the fourth quarter of fiscal 2012, up significantly from the 9 cents earned in the prior-year quarter. The year-over-year surge in earnings was driven by strong sales and volume growth in the quarter. Reported earnings also surpassed the Zacks Consensus Estimate of 23 cents per diluted share.

Quarter Highlights

The company reported revenue of $632.8 million in the fourth quarter of fiscal 2012, up 48% year over year, driven by volume growth. Reported revenue exceeded the Zacks Consensus Estimate of $558 million.

The number of homebuilding deliveries increased to 1,088 units, up 44% year over year, attributable to a rise in demand and low competition for luxury homes. The average delivery price was $582,000 in the quarter, up 3.0% y/y, owing to a mix of high priced products and price rise in some communities.

Net orders signed during the quarter were $684.1 million, up 75% year over year. Contracts were signed for 1,098 units, up 70%. Order growth was driven by the company’s strong brand name and attractive land positions. Highest order growth was registered in the West and South regions.

The company’s backlog totaled 2,569 homes as of October 31, 2012, up 54% y/y. Potential housing revenues from backlog grew 70% y/y to $1.67 billion, primarily attributable to hike in the prices of backlogs.

In fourth quarter 2012, the company’s cancellation rate (current-quarter cancellations divided by current-quarter signed contracts) declined to 4.6% compared with 7.9% in the prior-year quarter.

The company’s gross margin (excluding interest and write-downs) grew 40 basis points to 24.6%, driven by improved prices and volumes. Its reported pre-tax income (excluding write-downs) was $60.7 million, up significantly from $15.3 million in the fourth quarter of 2011.

Fiscal 2012

The company reported earnings of $2.86 per diluted share in fiscal 2012, up from 24 cents in fiscal 2011. The year-over-year surge in earnings was driven by strong revenue and order growth throughout the year.

The company reported revenue of $1.88 billion, up 28% from the prior-year level. The top line growth exceeded the company’s guidance range of $1.71 billion to $1.84 billion in fiscal 2012. The company delivered 3,286 homes in fiscal 2012, up 26% year over year and exceeds the guidance range of 3,000 and 3,200 homes. The company reported $2.56 billion of net order signed, up 59% year over year.

Outlook

Based on fiscal 2012 performance, Toll Brothers expects to deliver 3,600 to 4,400 homes in fiscal 2013. The average price of homes is expected to be in the range of $595,000 to $630,000. The company expects 225 to 255 selling communities at the end of fiscal 2013.

Our Take

We are positive about the strong overall growth witnessed by Toll Brothers throughout fiscal 2012. We are encouraged by the company’s bullish growth projection for the upcoming quarters, backed by the gradually recovering homebuilding market. We believe that homebuilders like Toll Brothers and Lennar Corporation (LEN - Analyst Report), who have significant land positions, broad geographic and product diversity, and are in a better capital position, are expected to benefit the most as market conditions improve.

Both Toll Brothers, Inc. and its peer Lennar Corporation carry a Zacks #3 Rank (short-term ‘Hold’ rating). Longer-term, we are maintaining our Neutral recommendation on both the companies. 

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