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Will Lower Revenues Mar Toll Brothers (TOL) Q2 Earnings?

Zacks Equity Research

Toll Brothers Inc. TOL is set to report second-quarter fiscal 2019 results on May 21, after market close. In the last reported quarter, the company’s earnings came in at 76 cents per share, beating the Zacks Consensus Estimate by 20.6%. In fact, the stock outpaced the Zacks Consensus Estimate in the trailing five quarters.

First-quarter fiscal 2019 revenues of $1.36 billion also topped the consensus mark of $1.29 billion. The bottom line fell 8.4% from the year-ago profit level but the top line increased 16%, reflecting higher deliveries and pricing.

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 77 cents per share, remaining unchanged over the past 30 days. This is indicative of a decline of 2.5% from the year-ago reported figure. Revenues are expected to be $1.54 billion, down 3.6% year over year.


Toll Brothers Inc. Price and EPS Surprise


Toll Brothers Inc. Price and EPS Surprise

Toll Brothers Inc. price-eps-surprise | Toll Brothers Inc. Quote

Factors That Might Influence Q2 Results

Softness in homebuying demand, owing to affordability challenges and general market uncertainty, is expected to impact the company’s order flow. That said, since the beginning of calendar year 2019, the U.S. housing market has been regaining strength, courtesy of declining mortgage rates and moderating home prices. Also, favorable job market and economic conditions are expected to provide support to some extent in mitigating the headwinds in the quarter to be reported.

For the fiscal second quarter, the company expects home deliveries between 1,650 units and 1,850 units (versus 1,886 units delivered in the prior-year period).

It 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, which is a positive for the to-be-reported quarter as well. The company expects average price of homes delivered between $860,000 and $890,000 (versus $847,900 a year ago).

Meanwhile, we are concerned about escalating building material and labor costs that are proving to be a drag on the company’s margins. Toll Brothers expects adjusted gross margin in the fiscal second quarter to be approximately 23.1% compared with 18.8% in the year-ago period.

Moreover, the company expects SG&A expenses to be approximately 11.3% of revenues, comparing unfavorably with the year-ago figure of 10.4%.

Overall, lower revenues arising from lower deliveries are expected to impact the top line. Again, higher discounts and incentives to drive volume will likely compress its gross margins. Also, de-leverage in the SG&A to sales ratio, mainly due to reduced closings, is expected to impact the company’s bottom line.

Quantitative Model Prediction

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.

Earnings ESP: Earnings ESP, which represents the difference between the Most Accurate Estimate and the Zacks Consensus Estimate, is 0.00%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Currently, it carries a Zacks Rank #4 (Sell). Note that we caution against stocks with a Zacks Ranks #4 or 5 (Strong Sell) going into the earnings announcement, especially when the company is witnessing negative estimate revisions.

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

Peer Releases

PulteGroup Inc.’s PHM first-quarter 2019 earnings and revenues surpassed the respective Zacks Consensus Estimate. Earnings per share came in at 59 cents, beating the consensus mark of 47 cents by 25.5%. The bottom line was in line with the year-ago figure. Total revenues of $1.99 billion outpaced the consensus mark and the year-ago figure of $1.97 billion.

Lennar Corporation LEN reported first-quarter fiscal 2019 (ended Feb 28, 2019) results, wherein earnings and revenues missed the respective Zacks Consensus Estimate by 1.3% and 5.3%.

D.R. Horton, Inc. DHI reported better-than-expected results in second-quarter fiscal 2019. Earnings came in at 93 cents per share in the quarter, surpassing the Zacks Consensus Estimate of 86 cents by 8.1%. Total revenues (Homebuilding, Forestar and Financial Services) of $4.1 billion also topped the consensus mark of $4 billion.

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