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Why weather depressed Toll Brothers’ traffic for the 1st quarter

Brent Nyitray, CFA, MBA

Toll Brothers 1Q14 earnings report: Margins keep expanding (Part 2 of 4)

(Continued from Part 1)

Revenues increased in Q1

Toll Brothers reported first quarter revenues of just over $644 million, which was slightly higher than Street estimates of $640 million. This was an increase of 51% 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. Weather was a factor in the first quarter, as snowstorms battered the Northeast, Mid-Atlantic, and the Midwest.

Pay attention to both units and dollar values

The thing to watch with the homebuilders, especially in this environment where inventory is tight, is comparisons in units and dollar volume. In particular, while Toll reported contract signings were down 6% in unit terms, they were actually up 14% in dollar terms. This is because prices are rising very rapidly—especially at the high end of the market. Their average selling price of a net signed contract was $766,000 versus $631,000 a year ago. While this isn’t necessarily an apples-to-apples comparison, it does speak to strength in house prices overall. Some of it is rising real estate prices in general, and some of it is better performance that the higher price points. And finally, some of it is due to simple geography—Toll is situated in the best-performing markets.

Deliveries and backlog

Deliveries in Q1 rose 52% in dollar terms and 24% in units. Backlog (which is an indication of future revenues) increased 45% in dollars and 31% in units. With the acquisition of Shapell, Toll added $105 million and 126 units to its backlog. At the end of the quarter, Toll had approximately 51,200 lots owned and optioned, compared to 46,600 at the end of 2013 and 43,700 the year before. The company finished the quarter with 238 selling communities compared to 232 last quarter and 225 the year before. With the Shapell acquisition, it 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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