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Why Is Toll Brothers (TOL) Down 6.4% Since Last Earnings Report?

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It has been about a month since the last earnings report for Toll Brothers (TOL - Free Report) . Shares have lost about 6.4% 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 its most recent earnings report in order to get a better handle on the important drivers.

Toll Brothers (TOL - Free Report) Q4 Earnings, Revenues Beat on Solid Demand

Toll Brothers, Inc. reported stellar fourth-quarter fiscal 2020 results, beating analysts’ earnings and revenue expectations by 26% and 23.9%, respectively.

Douglas C. Yearley, Jr., chairman and chief executive officer, said, “We are currently experiencing the strongest housing market I have seen in my 30 years at Toll Brothers and we continue to increase prices in nearly all of our communities as we focus on driving profitability and managing growth.”

Earnings & Revenue Discussion

The country's leading luxury homebuilder reported earnings of $1.55 per share for the quarter under review, which beat the Zacks Consensus Estimate of $1.23 by 26%. The figure also grew 9.9% from the year-ago level of $1.41 per share as a result of higher revenues and margins.

Consolidated revenues of $2.55 billion topped the consensus mark of $2.08 billion by 23.9%. The reported figure also increased 7% year over year due to higher deliveries.

Segment Detail

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

Revenues from Traditional Home Building grew 9.5% year over year to $2.48 billion but that of City Living decreased 37.1% to $18 million for the quarter.

Inside the Headline Numbers

Homebuilding deliveries during the quarter were up 10% year over year to 2,940 units. Except North and Mid-Atlantic, deliveries increased in all other regions served by the company. Deliveries in Citi Living declined to 11 units from 28 units a year ago.

The average price of homes delivered was $849,000 for the quarter, down 1% from the year-ago level of $857,800.

The number of net signed contracts or orders during the reported quarter was 3,407 units, up 68% year over year. The value of net signed contracts was $2.74 billion, reflecting a 63% increase from the year-ago quarter.

At fiscal 2020-end, it had a backlog of 7,791 homes, representing a 24.3% year-over-year increase. Potential revenues from backlog also grew 21% year over year to $6.37 billion. Its backlog attained the highest year-end level in 15 years.

Cancellation rate for the reported quarter was 5.4%, reflecting a decrease from 8.9% in the prior-year period.

Margins

The company's adjusted home sales gross margin was 24%, which expanded 10 basis points (bps).

SG&A expenses — as a percentage of home sales revenues — were 9.9%, down 120 bps from the year-ago quarter. Operating margin of 10.2% was up 70 bps for the quarter.

Financials

Toll Brothers had $1.37 billion cash and cash equivalents as of Oct 31, 2020 compared with $1.29 billion at fiscal 2019-end.

Total debt at fiscal 2020-end was $3.96 billion, slightly up from $3.92 billion at fiscal 2019-end. Debt to capital was 44.8% at fiscal 2020-end versus 43.6% a year ago.

Fiscal 2020 Highlights

Earnings came in at $3.40 per share, down from $4.03 a year ago. Total revenues of $5.66 billion were also down 0.1% from a year ago. Homebuilding deliveries during the quarter were up 4.8% year over year to 8,496 units. The average price of homes delivered was $816,500 for the quarter, down from the year-ago level of $873,400.

First-Quarter Fiscal 2021 Guidance

For the quarter, home deliveries are anticipated to be 1,675 units at an average price of $780,000-$800,000 (suggesting a decrease from the year-ago figure of $805,300). Home deliveries in the year-ago period were 1,611 units.

Toll Brothers expects adjusted home sales gross margin of 22.4%, implying growth from 20.9% recorded in the year-ago period. SG&A expenses, as a percentage of home sales revenues, are projected at 15.8% (indicating 100-bps increase from 14.8% a year ago).

Fiscal 2021 Guidance

The company expects deliveries between 9,600 and 10,200 homes at an average price of $790,000-$810,000. Toll Brothers expects adjusted home sales gross margin of 22.4%. SG&A expenses, as a percentage of home sales revenues, are projected at 12.2%.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month. The consensus estimate has shifted -16.1% due to these changes.

VGM Scores

At this time, Toll Brothers has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with an F. However, 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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