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Toll Brothers (TOL) to Post Q4 Earnings: Is a Beat in Store?

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Toll Brothers Inc. (TOL - Free Report) is set to report fourth-quarter fiscal 2018 results on Dec 4, after market close. The company delivered a positive earnings surprise of 22.3% in the last reported quarter. In fact, it surpassed the Zacks Consensus Estimate in three out of the trailing four quarters, with average positive surprise of 10.3%.

How are Estimates Faring?

Let’s take a look at the estimate revision trend in order to get a clear picture of what analysts are thinking about the company prior to the earnings release. The Zacks Consensus Estimate for the quarter to be reported is pegged at $1.82, trending downward from $1.84 over the past 30 days. Nonetheless, this reflects an expected growth of 55.6% from $1.17 reported in the year-ago quarter. Revenues are expected to be $2.33 billion, up 15% year over year.

Shares of Toll Brothers have gained 8.4% in the past 30 days, outperforming its industry’s collective growth of 6.7%.


Factors That Might Influence Q4 Results

The company mostly serves 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. Toll Brothers enjoys greater pricing power than other homebuilding companies, leading to strong earnings, revenues, contracts and backlog growth. Moreover, its robust backlog provides it sufficient room to generate revenues in the near term. At the end of the fiscal third quarter, Toll Brothers had a backlog of 7,100 homes, up 13% from the prior-year quarter. Potential housing revenues from backlog grew 22% year over year to $6.48 billion (the highest third-quarter backlog in 12 years).

Toll Brothers has been recording double-digit growth over the last few quarters. The trend continued in the first nine months of fiscal 2018 as well, with the company registering double-digit growth in revenues (up 27.3%), contracts (up 20% in dollars) and backlog (up 22% in value). This reflects the health of the luxury new home market. The third quarter of fiscal 2018 marked the 16th consecutive period of year-over-year growth in contract dollars. The trend is expected to continue in the to-be-reported quarter as well.

The company expects fiscal fourth-quarter home deliveries between 2,550 units and 2,850 units (versus 2,424 units delivered in the prior-year quarter) at an average price of $840,000-$870,000 (versus $836,600 a year ago).

The consensus estimate for home deliveries stands at 2,724 units, implying 12.4% year-over-year and 21.3% sequential growth. Meanwhile, the consensus estimate for average selling price of $865 million indicates an increase of 3.3% from a year ago and 1.5% sequentially.

Despite all these positives, we are concerned about the escalating building material and labor costs that are proving to be a drag on the company’s margins. Furthermore, high mortgage rates dilute the demand for new homes, as mortgage loans have become expensive, hurting buyers’ affordability and the company’s top line to some extent.

Toll Brothers expects adjusted gross margin in the fiscal fourth quarter to be approximately 24.8% compared with 25.3% in the year-ago quarter.

Meanwhile, the company expects SG&A expenses to be approximately 8.1% of the revenues. This compares favorably with the year-ago figure of 8.3%. This will help the company offset gross margin headwinds and boost its bottom line.

Toll Brothers Inc. Price and EPS Surprise

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

What Does the Zacks Model Unveil?

Toll Brothers has the right combination of the two key ingredients — a positive Earnings ESP and a Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: Toll Brothers has an Earnings ESP of +3.68%.

Zacks Rank: Toll Brothers currently carries a Zacks Rank #3, which increases the predictive power of ESP. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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

Peer Releases

D.R. Horton, Inc.’s (DHI - Free Report) fourth quarter of fiscal 2018 earnings came in at $1.22 per share in the quarter, missing the Zacks Consensus Estimate by a penny. Nevertheless, the reported figure surged 49% from the year-ago profit level of 82 cents.

PulteGroup Inc. (PHM - Free Report) reported impressive third-quarter 2018 results, with earnings and revenues beating the Zacks Consensus Estimate. Moreover, the company’s top and bottom lines grew considerably, courtesy of higher revenues and margin improvement.

NVR, Inc. (NVR - Free Report) reported third-quarter 2018 earnings of $48.28 per share, beating the Zacks Consensus Estimate of $47.64 by 1.3%. Also, earnings increased 27% from the prior-year quarter, primarily owing to a reduction in effective tax rate.

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