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Can Toll Brothers (TOL) Keep Earnings Streak Alive in Q1?

Zacks Equity Research
Wall Street closed in the red on Friday following news that the trade-related negotiations between the United States and China have stalled.

Toll Brothers Inc. TOL is set to report first-quarter fiscal 2019 results on Feb 26, after market close. In the last reported quarter, the company’s earnings came in at $2.08 per share, beating the Zacks Consensus Estimate by 14.3%. Revenues of $2.46 billion also topped the consensus mark of $2.33 billion. In fact, the stock outpaced the Zacks Consensus Estimate in all the trailing four quarters, with average positive surprise of 14.3%.

Meanwhile, fourth-quarter fiscal 2018 earnings grew 78% from the year-ago profit level. Revenues also increased by an impressive 21% year over year, 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 63 cents per share, remaining unchanged over the past 60 days. This reflects flat year-over-year growth. Revenues are expected to be $1.28 billion, up 8.7% year over year.

Factors That Might Influence Q1 Results

Despite a healthy economy, ongoing housing market headwinds, comprising rising interest rates and home prices, affected the company’s fiscal fourth-quarter new orders, which declined for the first time in four years. Contracts in the quarter decreased 15% in dollars and 13% in units. While concerns surrounding affordability and rising mortgage rates have been plaguing the industry of late, Toll Brothers, like other homebuilders, remains optimistic about the ongoing traffic trends that indicate higher inclination of buyers, thereby reflecting a slow but steady housing recovery.

For first-quarter fiscal 2019, the company expects home deliveries between 1,350 units and 1,550 units (versus 1,423 units delivered in the prior-year period) at average price of $850,000-$880,000 (versus $826,000 a year ago).

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, leading to strong earnings, revenues, contracts and backlog growth.

Toll Brothers has been recording double-digit growth over the last few quarters. The trend continued in fiscal 2018 as well, with the company recording double-digit growth in revenues (up 23%) and deliveries (up 16% in units), following respective gains of 12% and 17% in fiscal 2017. This reflects the health of the luxury new home market. Management believes that Toll Brothers remains well positioned to benefit from robust economy, improving demographics and financial health of its affluent customer base.

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. 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 first quarter to be approximately 23.5% compared with 23.7% in the year-ago period.

Meanwhile, the company expects SG&A expenses to be approximately 13.1% of revenues, comparing favorably with the year-ago figure of 13.4%. This will help offset gross margin headwinds and aid its 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, the company carries a Zacks Rank #3. Meanwhile, we caution against stocks with a Zacks Ranks #4 or 5 (Sell rated) 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 fourth-quarter 2018 earnings and revenues not only surpassed the Zacks Consensus Estimate but also grew considerably on a year-over-year basis.

D.R. Horton, Inc.’s DHI earnings came in at 76 cents per share in first-quarter fiscal 2019, missing the Zacks Consensus Estimate by 2 cents. The reported figure also decreased 1.3% from the year-ago adjusted profit level of 77 cents.

Lennar Corporation’s LEN fourth-quarter 2018 adjusted earnings of $1.96 per share topped the consensus mark of $1.93 by 1.6%. However, total revenues of $6.46 billion missed the consensus estimate of $6.53 billion.

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