It has been about a month since the last earnings report for Toll Brothers (TOL - Free Report) . Shares have lost about 5.3% 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 the most recent earnings report in order to get a better handle on the important drivers.
Toll Brothers Q2 Earnings Top, Recent Orders Improve
Toll Brothers, Inc.’s second-quarter fiscal 2020 earnings topped the Zacks Consensus Estimate but revenues missed the same. Although COVID-19 impacted its order trends from Mar 16 to Apr 30, the recent trends observed by Toll Brothers suggest that “the housing market may be more resilient than anticipated just two months ago.”
Douglas C. Yearley, Jr., chairman and chief executive officer, said, “Our deposits, which typically precede a binding sales contract by about three weeks and represent a leadingindicator of current market demand, were up 13% over the past three weeks versus the same three-week period last year. Importantly, our recent deposit-to-contract conversion ratio has remained consistent with pre-Covid-19 levels. Web traffic hasalso steadily improved from the lows we experienced in mid-March and has returned to the same strong activity we enjoyedpre-Covid-19 in February.”
Earnings & Revenue Discussion
The country's leading luxury homebuilder reported earnings of 59 cents per share in the quarter under review, beating the consensus mark of 48 cents by 22.9%. However, the said figure dropped 32.2% from the year-ago level of 87 cents as a result of lower revenues, higher SG&A expenses, as well as reduced margins.
Consolidated revenues of $1.55 billion lagged the consensus mark of $1.56 billion by 0.8%. The reported figure also decreased 9.7% year over year due to lower average selling prices.
Toll Brothers operates under two reportable segments, namely Traditional Home Building and Urban Infill ("City Living").
Revenues from Traditional Home Building declined 9% year over year to $1.48 billion and that of City Living decreased 56.2% to $36.8 million during the quarter.
Inside the Headline Numbers
Homebuilding deliveries during the quarter were up 1% year over year to 1,923 units. Deliveries increased in all the regions served by the company, except North and Pacific. Deliveries in Citi Living declined to 29 units from 72 units a year ago.
The average price of homes delivered was $788,500 in the quarter, down 12% from the year-ago level of $895,900.
The number of net signed contracts or orders during the reported quarter was 1,886 units, down 22% year over year. The value of net signed contracts was $1.55 billion, reflecting a 22% decrease from the year-ago quarter. Notably, 40% of the company’s selling communities and 50% of the dollar value of backlog were concentrated in highly-impacted markets. From Mar 16 through Apr 30, Toll Brothers’ net signed contracts declined 64% year over year.
At fiscal second quarter-end, it had a backlog of 6,428 homes, representing a 1% year-over-year decrease. Potential revenues from backlog also declined 3% year over year to $5.49 billion.
Cancellation rate during the reported quarter was 9.7%, reflecting an increase from 5.3% in the prior-year period.
The company's adjusted home sales gross margin was 21%, which contracted 250 bps in the quarter.
SG&A expenses — as a percentage of home sales revenues — were 11.8%, up 140 bps from the year-ago quarter. Operating margin of 6% was down 340 bps in the quarter.
Toll Brothers had $741.2 million cash and cash equivalents as of Apr 30, 2020 compared with $1.29 billion at fiscal 2019-end and $519.8 million at fiscal first quarter-end. During the first half of the fiscal second quarter, the company repurchased 4.3 million shares for a total purchase price of $157.5 million.
At fiscal second quarter-end, it had $2 billion of liquidity that included $741.2 million of cash and marketable securities, as well as $1.3 billion available under the $1.9-billion revolving credit facility. Notably, this facility will mature in November 2024. The company has no significant debt maturities until February 2022. Owing to business disruptions and unprecedented impact of the COVID-19 pandemic on the U.S. economy, the company revoked its fiscal 2020 guidance.
How Have Estimates Been Moving Since Then?
It turns out, estimates review have trended downward during the past month. The consensus estimate has shifted -16.67% due to these changes.
Currently, Toll Brothers has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. However, the stock was 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.
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.