A month has gone by since the last earnings report for Toll Brothers Inc. (TOL - Free Report) . Shares have lost about 4.8% in that time frame.
Will the recent negative trend continue leading up to its next earnings release, or is TOL 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 catalysts.
Toll Brothers reported adjusted earnings of 79 cents per share (adjusted for asset impairment costs) in the second quarter of fiscal 2018, beating the Zacks Consensus Estimate of 76 cents.
Without the adjustment, the homebuilder reported earnings of 72 cents per share compared with 73 cents a year ago.
The company reported revenues of $1.60 billion in the fiscal second quarter, beating the consensus mark of $1.57 billion. The reported figure increased 17% year over year, marking the highest second-quarter total revenues in the company’s history.
Although the company exhibited robust quarterly results, investors reacted negatively, probably mirroring concerns about labor and material cost inflation.
Toll Brothers operates under two segments — Traditional Home Building and Urban Infill ("City Living").
Traditional Home Building revenues during the quarter totaled $1.51 billion, up 17.3% year over year, while City Living revenues of $89.6 million increased from $76.6 million a year ago, courtesy of higher pricing.
Inside the Headline Numbers
Consolidated homebuilding deliveries increased 15% year over year to 1,886 units in the quarter. Deliveries increased across all the regions (barring Citi Living), i.e., North, Mid-Atlantic, South, West, California and City Living. Deliveries at the Citi Living were 6.5% down from the year-ago level.
The average price of homes delivered was $847,900 in the quarter, up 1.9% from the year-ago level of $832,400.
The number of net signed contracts was 2,666 units in the quarter, up 6% year over year. The value of net signed contracts was $2.38 billion (highest quarterly total in the company’s history), reflecting an increase of 18% from the year-ago quarter. This marks the 15th consecutive quarter of year-over-year growth in contracts.
At the end of fiscal second quarter, Toll Brothers had a backlog of 7,030 homes, up 17% from the prior-year quarter. Potential housing revenues from backlog grew 27% year over year to $6.36 billion. The average price of backlog was $904,800 compared with $831,000 in the prior-year quarter.
The company’s homebuilding adjusted gross margin contracted 180 basis points (bps) to 18.8% in the quarter under review. The downside was due to some delayed high-margin California closings, which the company expects to shift into the third quarter. Additionally, higher labor and material cost, and its strategy of reducing standing inventory in some of its finished condo projects in New York City had an impact on gross margin.
As a percentage of revenues, SG&A expenses improved 40 bps to 10.4% in the quarter.
The operating margin of 8.4% plunged 170 bps in the quarter.
Toll Brothers had $475.1 million in cash as of Apr 30, 2018 compared with $712.8 million as of Oct 31, 2017.
During the fiscal second quarter, Toll Brothers repurchased approximately 1.8 million shares of common stock at an average cost of $45.44 per share, for a total purchase price of approximately $81.5 million.
Fiscal Third-Quarter Guidance
The company expects home deliveries between 2,100 and 2,200 units, at an average price of $830,000-$850,000.
Adjusted gross margin in the quarter is expected to be approximately 23.4% compared with 23.4% in the year-ago quarter.
SG&A expenses are estimated at approximately 9.6% of the revenues.
Fiscal 2018 Guidance
Home deliveries are now anticipated in the range of 8,000-8,500 units (versus 7,800-8,600 units expected earlier) at an average price of $830,000-$860,000 (versus prior expectation of $820,000-$860,000).
The company raised the lower end of its earlier guided range for total revenues. Currently, it expects revenues to be between $6.64 billion and $7.31 billion versus $6.4-$7.4 billion expected earlier. In fiscal 2017, the company reported revenues of $5.81 billion.
Toll Brothers reaffirmed its adjusted gross margin in the range of 23.75-24.25% compared with 24.8% in fiscal 2017. SG&A expenses are estimated at approximately 10% of the revenues.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. There have been six revisions lower for the current quarter.
At this time, TOL has an average Growth Score of C, however its Momentum is doing a lot better with an A. The stock was also allocated a grade of A on the value side, putting it in the top quintile 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.
Based on our scores, the stock is more suitable for value and momentum investors than growth investors.
Estimates have been broadly trending downward for the stock and the magnitude of these revisions indicates a downward shift. Notably, TOL has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.