Back to top
Read MoreHide Full Article

U.S. homebuilder Toll Brothers, Inc. (TOL - Free Report) reported adjusted earnings of 52 cents per share in the fourth quarter of fiscal 2013, surpassing the Zacks Consensus Estimate of 42 cents by 23.8%. Adjusted earnings increased 48.6% from the prior-year quarter on the back of top-line growth.

The company reported revenues of $1.04 billion in the fourth quarter of fiscal 2013, up 65.0% year over year, driven by volume growth and aggressive pricing. Reported revenues also surpassed the Zacks Consensus Estimate of $977 million by 6.1%.  

Toll Brothers surpassed both revenue and earnings estimates in the fourth quarter of fiscal 2013 attributable to aggressive pricing and increased number of homes delivered, both of which exceeded the company’s guided range by a wide margin.

Homebuilding Revenues and Orders

The number of homebuilding deliveries increased to 1,485 units in the fourth quarter of fiscal 2013, up 36% year over year, attributable to a rise in demand and low competition for luxury homes. The number of homes delivered exceeded management’s guided range of 1,225 to 1,425 homes. The average price of homes delivered was $703,000 in the quarter, up 20.8% year over year. Pricing in the quarter exceeded the company’s expected range of $675,000 and $695,000. The company ended fiscal 2013 with 232 selling communities, up 3.6% from the prior year and higher than the company’s expectation of 225 selling communities.

The number of net orders signed was 1,163 in the fourth quarter of fiscal 2013, up 6% year over year. Value of net orders signed during the quarter was $839.0 million, up 23% year over year. Order growth was weak compared to the strong results in fourth quarter fiscal 2012. The fourth quarter 2012 witnessed 70% and 75% increase in order numbers and value, respectively. Management claimed price increase, recent hike in interest rates and uncertainty concerning federal budget slightly lowered order growth. In fact, in the first five weeks of first quarter 2014, the company witnessed flat orders compared to strong year-ago comparisons. However, the company believes this slowing demand trend is temporary and will wear off as the market gains momentum.  

The company’s backlog totaled 3,679 homes as of Oct 31, 2013, up 43% year over year. Potential housing revenues from backlog grew 57% year over year to $2.63 billion, primarily attributable to hike in prices of backlogs.

Like another homebuilding company Lennar Corporation (LEN - Free Report) , Toll Brothers is using its strong liquidity position to secure the most sought-after urban locations in the country like New York City Market, Northern New Jersey, Philadelphia and Washington D.C. Last month, Toll Brother entered into an agreement to purchase the homebuilding business of Calif.-based Shapell Industries, Inc. for $1.60 billion; which is expected to largely boost its presence in the upscale Californian housing market. Though demand in the homebuilding market is gaining traction, the supply side is still weak. Following the acquisition, Toll Brothers will gain control over Shapell's entire land portfolio in the California market. It will provide the company an additional 5,200 lots and homes for future sales, thereby strengthening its supply side. With the present demand supply gap in the housing market, Toll Brothers’ strong land position is expected to help it garner increased market share.  

Margin Discussion

The company’s homebuilding gross margin (excluding interest and write-downs) grew 80 basis points (bps) to 25.4% and improved 30 bps sequentially, driven by improved pricing and increased volume. As a percentage of revenues, however, selling, general and administrative expenses improved 290 basis points to 8.9% due to increased revenues in the quarter. Operating margin improved 400 bps year over year to 12.3% on the back of improved homebuilding gross margin and improved SG&A ratio.

Fiscal 2013

In line with Zacks Consensus Estimate, the company reported revenues of $2.67 billion in fiscal 2013, up 42.0% year over year, driven by volume growth and aggressive pricing. Revenues exceeded the company’s guided range of $2.46 billion to $2.62 billion.

Fiscal 2014 Outlook

Toll Brothers expects to deliver 5,100 to 6,100 homes in fiscal 2014, with average prices ranging between $670,000 and $720,000. The company expects 2014 full year gross margin to improve 175 to 200 basis points over 2013 levels. The company expects community count to remain between 250 and 290 in fiscal 2014.

Toll Brothers currently currently holds a Zacks Rank #3 (Hold). Better-ranked homebuilding companies include Meritage Homes Corporation (MTH - Free Report) and M/I Homes, Inc. (MHO - Free Report) . Both these stocks carry a Zacks Rank #2 (Buy).

More from Zacks Analyst Blog

You May Like