It has been about a month since the last earnings report for Toll Brothers (TOL). Shares have added about 2.3% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Toll Brothers due for a pullback? 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 Q1 Earnings & Revenues Top, Margins Grow
Toll Brothers, Inc.’s earnings and revenues topped the Zacks Consensus Estimate, given strong revenue growth and gross margins, along with improved SG&A leverage.
Management believes that the company remains well positioned to take advantage of the robust economy, improving demographics and financial health of its affluent customer base.
Earnings & Revenues
The country’s leading luxury homebuilder reported earnings of 76 cents per share in the fiscal first quarter, beating the Zacks Consensus Estimate of 63 cents by 20.6%. However, the reported figure fell 8.4% from the year-ago profit level of 83 cents as a result of higher effective tax rate.
The company reported revenues of $1.36 billion in the quarter, beating the consensus mark of $1.28 billion. The reported figure also increased 16% year over year, reflecting higher home sales revenues, deliveries and pricing.
Toll Brothers operates under two segments, namely Traditional Home Building and Urban Infill ("City Living").
Revenues from Traditional Home Building were up 18.5% year over year to $1.25 billion, while the same from City Living decreased to $68.6 million from $117.6 million a year ago.
Inside the Headline Numbers
Consolidated homebuilding deliveries in the quarter increased 12% to 1,530 units and 8% year over year in dollars. Deliveries increased across all the regions, i.e., North, South, West and California, barring Mid-Atlantic. Deliveries at Citi Living were flat with the prior-year level at 64 units.
The average price of homes delivered was $862,300 in the quarter, up 4.4% from the year-ago level of $826,000.
The number of net signed contracts was 1,379 units in the quarter, down 24% year over year. The value of net signed contracts was $1.16 billion, reflecting a decrease of 31% from the year-ago quarter.
At the end of fiscal 2018, Toll Brothers had a backlog of 6,105 homes, up 4% from the corresponding period of 2017. Potential housing revenues from backlog declined 4% year over year to $5.37 billion. The average price of backlog was $901,000, up 1% from $892,000 in the prior-year quarter.
The company’s home sales adjusted gross margin expanded 50 bps to 24.2% in the quarter under review.
As a percentage of revenues, SG&A expenses improved 110 bps to 12.3% in the quarter. Operating margin of 9.1% grew 200 bps.
Toll Brothers had $801.7 million in cash as of Jan 31, 2019 compared with $1.18 billion at fiscal 2018-end.
During fiscal first quarter, the company repurchased 785,000 shares, at average price of $32.02 per share, for a total purchase price of approximately $25.1 million.
Fiscal Second-Quarter 2019 Guidance
The company expects home deliveries between 1,650 units and 1,850 units (versus 1,886 units delivered in the prior-year quarter) at average price of $860,000-$890,000 (versus $847,900 a year ago).
Adjusted gross margin in the quarter is expected to be approximately 23.1% compared with 18.8% in the year-ago period.
SG&A expenses are estimated to be approximately 11.3% of revenues (compared with 10.4% a year ago).
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -18.94% due to these changes.
At this time, Toll Brothers has a poor Growth Score of F, a grade with the same score on the momentum front. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% 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.
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 #4 (Sell). We expect a below average return from the stock in the next few months.
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