Balanced View on Toll Brothers


On Jun 20, 2014, we issued an updated research report on Toll Brothers Inc. (TOL).

On May 28, this leading luxury home building company reported second quarter fiscal 2014 results. Earnings surpassed the Zacks Consensus Estimate by 24% and the prior year quarter earnings of 7 cents on the back of strong revenues and margins.  

Reported revenues also beat the Zacks Consensus Estimate by 3.1%. In addition, revenues grew 67.0% year over year as aggressive pricing made up for flat orders. The average price of homes delivered rose 22.4% year over year in the quarter. The number of net orders signed in the second quarter of fiscal 2014 was flat year over year due to leveling of housing demand in the quarter. Housing demand has been flat for some time, which has been slowing down its order trends. However, management believes that there is pent up demand in the market, which will unleash as the housing market further recovers in the near future.   

Toll Brothers mostly caters to luxury move up buyers, who already posses a residence and are looking for a shift to larger and better homes. These homebuyers are less sensitive to price changes. Toll Brothers thus enjoys greater pricing power than other homebuilding companies.

The company is gaining from its aggressive investment in well-positioned land, strong liquidity position and greater pricing power in the luxury housing market. Moreover, its acquisition of the homebuilding business of Shapell Industries has strengthened its presence in the upscale Californian housing market.

However, rising interest rates, rising land, labor and material cost act as headwinds for the company. Shortage of lots and skilled labor and rising cost of materials have been making things difficult for builders for quite some time now. Additionally, the spike in mortgage rates and rising home prices are also hurting demand. As a result, many companies witnessed declining order trends in the last few quarters. One such homebuilding company is NVR, Inc. (NVR), which reported soft order trends in the last reported quarter.

Toll Brothers Inc. carries a Zacks Rank #3 (Hold).

Key Picks from the Sector

Investors interested in the homebuilding sector can consider stocks like Gafisa S.A. (GFA), and TRI Pointe Homes, Inc. (TPH). Both the companies hold a Zacks Rank #2 (Buy).

Read the Full Research Report on TOL
Read the Full Research Report on NVR
Read the Full Research Report on TPH
Read the Full Research Report on GFA

Zacks Investment Research

View Comments (0)