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Why Toll Brothers reports increasing revenues but falling orders

Brent Nyitray, CFA, MBA

Rising revenues: Toll Brothers' 3rd quarter 2014 earnings overview (Part 2 of 4)

(Continued from Part 1)

Revenues increased in Q3

Toll Brothers reported third quarter revenues of $1.057 billion, which was higher than Wall Street estimates of $978 million. This was an increase of 53% from the same quarter last year.

While these numbers were great on a year-over-year comparison, we’re starting to see the effects of increasing interest rates and home prices on housing demand, although the luxury end seems to be doing better than everything else.

The drop in contract signings spooks Wall Street

While Toll reported strong numbers that beat Wall Street on revenues and earnings per share, it also reported that contract signings were down 4% in dollar terms and down 6% in unit terms. This made investors worry that the growth trajectory of the builders is waning. This is because prices have been rising very rapidly—especially at the high end of the market.

The company’s average selling price of a net signed contract was $717,000 versus $707,000 a year ago. This is only a 1.4% increase in price versus a 12% increase in average selling prices for the quarter.

Toll isn’t the only builder that’s seeing a deceleration in orders on a unit basis. Virtually every builder—from Lennar (LEN) and D.R. Horton (DHI) to PulteGroup (PHM) and Standard Pacific (SPF)—noted that buyers are starting to balk at high prices and high interest rates.

Deliveries and backlog

Deliveries in Q3 rose 53% in dollar terms and 36% in units. Backlog (which is an indication of future revenues) increased 9% in dollars and 5% in units.

At the end of the quarter, Toll had approximately 49,000 lots owned and optioned, compared to 50,400 at the end of the second quarter and 47,200 the year before.

The company finished the quarter with 256 selling communities compared to 252 last quarter and 225 the year before. With the Shapell acquisition, the company anticipates ending FY 2014 with between 250 and 290 selling communities. This represents a lot of potential growth.

Continue to Part 3

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