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Toll Brothers (TOL) to Report Q2 Earnings: What's in Store?

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Toll Brothers Inc. (TOL - Free Report) is set to report second-quarter fiscal 2018 results on May 22, before the opening bell. The company delivered a positive earnings surprise in the last reported quarter and surpassed the Zacks Consensus Estimate by an average of 15.17% in the trailing four quarters.

Toll Brothers mostly caters to the luxury move-up buyers, who already possess a residence and are looking to shift to larger homes. These homebuyers are less sensitive to price changes. Thus, it enjoys an edge over other homebuilding companies, thereby resulting in strong earnings, revenues, contracts and backlog growth. Notably, the lack of competition in the luxury new home market proves beneficial for Toll Brothers.

Toll Brothers Inc. Price and EPS Surprise


Toll Brothers Inc. Price and EPS Surprise | Toll Brothers Inc. Quote


Let’s See How Things are Shaping Up for This Announcement

The 2018 outlook for the U.S. homebuilding industry is quite compelling, given the affordable interest rates and tight inventory, indicating pent-up demand. The company’s first quarter of fiscal 2018 marked the 14th consecutive period of year-over-year growth in contract dollars and units, with 20% or more growth recorded in the last few quarters.

For the to-be-reported quarter, the company expects home deliveries between 1,825 and 1,925 units, at an average price of $825,000-$850,000. This compares with the year-ago level of 1,638 units. The Zacks Consensus Estimate for home deliveries stands at 1,886 units, implying 32.5% sequential and 15.1% year-over-year growth.

Meanwhile, the consensus estimate for average selling price of $838 million indicates an increase from $826 million in the prior quarter and $832 million a year ago.

Now, for the company’s gross margin, Toll Brothers expects adjusted gross margin to be approximately 22.8%, implying a decline of 90 basis points (bps) sequentially and 150 bps year over year.

The shortage of buildable lots is limiting home production, thereby lowering the inventory of homes, both new and existing. Additionally, rising building materials and labor costs are growing concerns for the company’s margins. Land prices are inflating due to limited availability. The rising labor and material costs are threatening margins of noted homebuilders like D.R. Horton (DHI - Free Report) , Lennar (LEN - Free Report) and PulteGroup Inc. (PHM - Free Report) among others.

The company expects SG&A expenses at approximately 10.6% of the revenues. This compares favorably with the year-ago figure of 10.8% and 13.4% in the preceding quarter.

Overall, for the fiscal second quarter, the Zacks Consensus Estimate for total revenues stands at $1.57 billion, implying 14.8% year-over-year growth. The consensus estimate for earnings is pegged at 75 cents per share, reflecting an increase of 2.7% year over year.

Here is What Our Quantitative Model Predicts:

Our proven model does not conclusively show that Toll Brothers is likely to beat on earnings in the to-be-reported quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen.

Zacks ESP: Toll Brothers has an Earnings ESP of 0.00% as the Most Accurate estimate and the Zacks Consensus Estimate are both pegged at 75 cents. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Toll Brothers has a Zacks Rank #2, which increases the predictive power of ESP. However, the company’s 0.00% ESP makes surprise prediction difficult.

Meanwhile, we caution against stocks with a Zacks Rank #4 and 5 (Sell rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

You can see  the complete list of today’s Zacks #1 Rank stocks here.

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