Toll Brothers (TOL) Down 7.1% Since Last Earnings Report: Can It Rebound?

A month has gone by since the last earnings report for Toll Brothers (TOL). Shares have lost about 7.1% in that time frame, outperforming 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 (TOL) Q3 Earnings Top, View Down

Toll Brothers, Inc. reported third-quarter fiscal 2022 (ended Jul 31, 2022). Both the top and bottom lines topped the Zacks Consensus Estimate, and the company delivered record quarterly revenues and earnings; and exceeded gross margin guidance during the quarter. However, the homebuilder continues to grapple with municipal delays, labor shortages and supply-chain disruptions, along with a softer demand environment. As such, Toll Brothers lowered full-year deliveries expectation.

In view of the current market conditions, Douglas C. Yearley, Jr., chairman and chief executive officer, said, “As our third quarter progressed, we saw a significant decline in demand as the combined impact of sharply rising mortgage rates, higher home prices, stock market volatility and macroeconomic uncertainty caused many prospective buyers to step to the sidelines. However, in more recent weeks, we have seen signs of increased demand as sentiment is improving and buyers are returning to the market. Average weekly deposits in the first three weeks of August were up 25% compared to July.”

Earnings & Revenue Discussion

This Fort Washington, PA-based homebuilder reported earnings of $2.35 per share, which beat the Zacks Consensus Estimate of $2.30 by 2.2% and increased a 25.7% from the year-ago period.

Total revenues (including Home sales, Land sales and others) came in at $2.49 billion, which beat the consensus mark of $2.48 billion by 0.4% and rose 10.6% year over year. The uptrend was backed by higher pricing during the quarter.

Segment Detail

Toll Brothers operates under two reportable segments, namely Traditional Home Building and Urban Infill (City Living).

Revenues from Traditional Home Building totaled $2.25 billion, up 9.4% year over year and that of City Living decreased 98.5% to $2.8 million.

Inside the Headline Numbers

Home sales revenues grew 1% from the prior-year quarter to $2.26 billion. Homes delivered dipped 7% year over year to 2,414 units. Deliveries increased across all the geographic regions served by the company baring Mid-Atlantic and Pacific. The average price of homes delivered was $934,700 for the quarter, up from the year-ago level of $860,400.

The number of net signed contracts for the reported quarter was 1,266 units, down 59.9% year over year. The value of net signed contracts was $1.66 billion, reflecting a decrease of 44.1% from the year-ago quarter.

At fiscal third-quarter end, Toll Brothers had a backlog of 10,725 homes, representing a 0.6% year-over-year increase. Also, potential revenues from backlog improved 19% year over year to $11.2 billion. The average price of homes in backlog totaled $1,042,900, up from $885,200 at the end of third-quarter fiscal 2021.

Cancellation rate (as a percentage of signed contracts) for the reported quarter was 13% compared with 3.1% in the prior-year period.

Margins

The company’s adjusted home sales gross margin was 26%, expanding 330 basis points for the quarter. SG&A expenses — as a percentage of home sales revenues — were 10.3%, which decreased from 10.5% in the year-ago quarter.

Financials

Toll Brothers had cash and cash equivalents of $316.5 million at fiscal third-quarter end compared with $1.64 billion at fiscal 2021-end. At fiscal third-quarter end, it had $1.8 billion available under the $1.9 billion bank revolving credit facility, scheduled to mature in November 2026.

Total debt at fiscal third-quarter end was $3.31 billion, down from $3.56 billion at fiscal 2021-end. Debt to capital was 37.5% at fiscal third-quarter end versus 40.2% at fiscal 2021-end. During the quarter, the company repurchased 2 million shares of its common stock at an average price of $44.93 per share for approximately $91.6 million.

Fiscal Fourth-Quarter Guidance

Toll Brothers expects home deliveries of 3,250-3,550 units (indicating a rise at mid-point from 3,341 units delivered in the prior-year quarter) at an average price of $935,000-$955,000 (suggesting a rise from $883,100 a year ago).

Adjusted home sales gross margin is expected to be 29.2%, implying an increase from 25.9% in the year-ago period. SG&A expenses are estimated to be 8.7% of home sales revenues, indicating a decline from 8.8% in the year-ago period. The company expects the effective tax rate to be 24.8%.

Fiscal 2022 Guidance

For fiscal 2022, home deliveries are anticipated to be 10,000-10,300 units (versus 11,000-11,500 units expected earlier) at an average price of $915,000-$925,000 (versus $890,000-$910,000 of earlier projection). Toll Brothers still expects adjusted home sales gross margin of 27.5% compared with 25% reported in fiscal 2021. SG&A expenses, as a percentage of home sales revenues, for fiscal 2022 are projected to be 10.5% (10.4% expected earlier) versus 10.5% projected earlier. The expected figure indicates a fall from 10.9% reported in fiscal 2021.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision.

The consensus estimate has shifted -18.83% due to these changes.

VGM Scores

At this time, Toll Brothers has a subpar Growth Score of D, though it is lagging a bit on the Momentum Score front with an F. However, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Toll Brothers has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.

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