Toll Brothers Stock Falls 10% on Higher Material Costs and Rising Rates

Rising interest Rates and higher raw material costs saw leading luxury homebuilder Toll Brothers stock slump almost 10% despite reported better than expected fiscal second-quarter earnings Tuesday. Investors are uncertain about real estate in such an environment.

Rising interest Rates and higher raw material costs saw leading luxury homebuilder Toll Brothers stock slump almost 10% despite reported better than expected fiscal second-quarter earnings Tuesday. Investors are uncertain about real estate in such an environment.

Earnings

Reported adjusted earnings of 79 cents per share (adjusted for asset impairment costs) for the second quarter of fiscal 2018 ahead of consensus estimates of 76 cents. Unadjusted earnings were 72 cents per share compared with 73 cents a year ago. Revenues were $1.60 billion beating the consensus $1.57 billion which was up 17% year over year, marking the highest second-quarter total revenues in $TOL’s history.

Toll Brothers Inc NYSE: TOL

Reaction · May 22, Close $39.46 ▼ 4.17 (-9.56%)

Segment

Detail Toll Brothers operates under two segments

Traditional Home Building

Urban Infill (“City Living”).

Traditional Home Building revenues during the quarter totaled $1.51 billion, up 17.3% year over year, while City Living revenues of $89.6 million increased from $76.6 million a year ago, courtesy of higher pricing.

Highlights

  • Consolidated homebuilding deliveries rose 15% year over year to 1,886 units in the quarter.
  • Deliveries increased across all the regions (barring Citi Living), i.e., North, Mid-Atlantic, South, West, California and City Living.
  • Deliveries at the Citi Living were 6.5% down from the year-ago level.
  • The average price of homes delivered was $847,900 in the quarter, up 1.9% from the year-ago level of $832,400.
  • The number of net signed contracts was 2,666 units in the quarter, up 6% year over year.
  • Value of net signed contracts was $2.38 billion (highest quarterly total in the company’s history), reflecting an increase of 18% from the year-ago quarter.
  • This marks the 15th consecutive quarter of year-over-year growth in contracts.
  • At the end of fiscal second quarter, Toll Brothers had a backlog of 7,030 homes, up 17% from the prior-year quarter.
  • Potential housing revenues from backlog grew 27% year over year to $6.36 billion.
  • The average price of backlog was $904,800 compared with $831,000 in the prior-year quarter.

Margins

Toll Brothers’s homebuilding adjusted gross margin contracted 180 basis points (bps) to 18.8% in the quarter under review. The fall was due to delayed high-margin California closings, which the company expects to shift into the third quarter. Higher labor and material cost, and its strategy of reducing standing inventory in some of its finished condo projects in New York City had an impact on gross margin.

  • As a percentage of revenues, SG&A expenses improved 40 bps to 10.4% in the quarter.
  • Operating margin of 8.4% plunged 170 bps in the quarter.

Cash Position and Stock Repurchases

  • Toll Brothers had $475.1 million in cash as of Apr 30, 2018 compared with $712.8 million as of Oct 31, 2017.
  • During the fiscal second quarter, Toll Brothers repurchased approximately 1.8 million shares of common stock at an average price of $45.44 per share, for a total purchase price of approximately $81.5 million.

Outlook

In the fiscal third quarter $TOL expects home deliveries between 2,100 and 2,200 units at an average price of $830,000-$850,000. Adjusted gross margin in the quarter is expected to be approximately 23.4% compared with 23.4% in the year-ago quarter. SG&A expenses are estimated at approximately 9.6% of the revenues.

For fiscal 2018  home deliveries are now anticipated in the range of 8,000-8,500 units (versus 7,800-8,600 units expected earlier) at an average price of $830,000-$860,000 (versus prior expectation of $820,000-$860,000). The company raised the lower end of its earlier guided range for total revenues.

Currently, it expects revenues to be between $6.64 billion and $7.31 billion versus $6.4-$7.4 billion expected earlier. In fiscal 2017, the company had reported revenues of $5.81 billion.

Toll Brothers reaffirmed adjusted gross margin in the range of 23.75-24.25% compared with 24.8% in fiscal 2017. SG&A expenses are estimated at approximately 10% of the revenues.

Source: Toll Brothers. Zachs

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