Toll Brothers Misses Ests in 1Q

US. Homebuilder, Toll Brothers, Inc., (TOL - Snapshot Report) reported earnings of 3 cents per share in the first quarter of fiscal 2013, which largely missed the Zacks Consensus Estimate of 11 cents by 72.7%. We believe that lower average selling prices due to lower deliveries of high margin communities, may be the reason behind the miss.

Adjusted earnings (excluding write downs), however, were flat from the prior-year quarter, driven by improved volumes as the overall housing industry recovers steadily.

Quarter Highlights

The company reported revenues of $424.6 million in the first quarter of fiscal 2013, up 32% year over year, driven by volume growth. Reported revenues also missed the Zacks Consensus Estimate of $504 million.

The number of homebuilding deliveries increased to 746 units, up 32% year over year, attributable to a rise in demand and low competition for luxury homes. The average delivery price was $569,000 in the quarter, down 0.35% y/y, owing to change in mix toward low priced products.

Net orders signed during the quarter were $614.4 million, up 38% year over year. Number of net orders signed was 973 units, up 49% year over year. Order growth was driven by the company’s strong brand name and attractive land positions. The average price of net signed contracts was $631,000 in the quarter, down 7.5% year over year. The decline in average price of net signed contracts was due to strong comparison in the prior-year quarter.

The company’s backlog totaled 2,796 homes as of Jan 31, 2013, up 57% y/y. Potential housing revenues from backlog grew 66% y/y to $1.86 billion, primarily attributable to hike in the prices of backlogs.

The company’s gross margin (excluding interest and write-downs) grew 20 basis points to 23.4%, driven by improved volumes. Gross margin declined 120 basis points sequentially due to mix shift in deliveries from high margin communities to low margin communities. Its reported pre-tax income (excluding write-downs) was $9.0 million, up significantly from earnings of $1.7 million in the first quarter of 2012.

Selling, general and administrative expenses were $78.1 million in the quarter, up 12.2% year over year. As a percentage of revenues, selling, general and administrative expenses improved 320 basis points on the back of increased revenues in the quarter.

Outlook

Toll Brothers expects to deliver 3,750 and 4,300 homes in fiscal 2013 compared with the prior guidance of 3,600 to 4,400 homes. The company continues to expect average price of homes in the range of $595,000 to $630,000. The company expects 225 to 255 selling communities at the end of fiscal 2013. The company expects community count to grow thereafter in 2014. For full year 2013, margin is expected to improve 50 to 60 basis points.

In the second quarter of 2013, the company expects margins to decline 100 basis points due to expectation of higher deliveries of lower margin communities. Moreover, a number of high margin homes have been rescheduled to be delivered in the third quarter instead of the second quarter expected previously. Consequently, the company expects margins to improve 350 basis points in the third quarter over first quarter levels. For the fourth quarter of 2013, the company expects margins to improve 150 basis points.

Toll Brothers carries a Zacks Rank #3 (Hold). Stocks in the in the homebuilding sector that are currently performing well include NVR, Inc. (NVR - Snapshot Report), The Ryland Group, Inc. (RYL - Snapshot Report) and D.R. Horton Inc. (DHI - Analyst Report). While NVR carries a Zacks Rank #1 (Strong Buy), The Ryland Group and D.R Horton both carry a Zacks Rank #2 (Buy).