Toll Brothers Shares Off; Analysts Focus on Order Growth and Profit Margins

The Horsham, Pa., luxury homebuilder says that in the first six weeks of the fiscal first quarter demand has been stronger than it was in fiscal 2019's fourth quarter.
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Toll Brothers (TOL) - Get Report shares on Tuesday were lower as analysts said that while the luxury homebuilder’s fourth-quarter earnings exceeded their estimates, order growth and profit margins were concerns.

At last check, Toll Brothers shares were off 3.6% at $39.95. 

Late Monday, the Horsham, Pa., company reported stronger-than-expected fiscal fourth-quarter earnings and revenue.

In the quarter ended Oct. 31, Toll earned $1.41 a share, down 32% from $2.08 in the year-earlier quarter. Revenue declined 3.1% to $2.38 billion from $2.46 billion.

A survey of analysts by FactSet was looking for profit of $1.29 a share on revenue of $2.19 billion.

In a statement, Chairman and CEO Douglas Yearley Jr. said demand from buyers steadily improved through the year. Fourth-quarter contracts were up 18% in units and 12% in dollars.

He called the economic environment "positive," noting that October housing starts were the strongest since July 2007 while the supply of homes on the market "remains constrained."

Consumer confidence is healthy and interest rates and unemployment remain low, the executive said.

And he said that in the first six weeks of the fiscal 2020 first quarter, demand has been stronger than it was in fiscal 2019's fourth quarter.

But at J.P. Morgan, analyst Michael Rehaut said “first-quarter gross-margin guidance of 21.25% was below the fiscal fourth quarter’s 21.9%, in contrast to most other builders’ calendar fourth-quarter’s gross margins expected to be flat to up slightly.” And the 18% order figure lagged his 23% estimate.

Rehaut pegged the stock underweight with a price target of $38.

Kenneth Zener at KeyBanc called the 18% number the “bright spot in the quarter” since it was ahead of the Wall Street consensus.

But he found the margin tightening “worrisome.” Zener measured Toll Brothers at sector weight.

And another neutral rating comes in from Jay McCanless at Wedbush, who targets the stock at $36.

He titled his report: “Demand surpassed our estimate, but profit margins may be an issue.”

Broadly, McCanless said, the fiscal-fourth-quarter “order comparison and management's commentary on first-quarter order growth were much more positive than we expected.”

For the first quarter, Toll Brothers expects to deliver 1,650 to 1,850 homes. Toll Brothers estimates the average price of those first-quarter deliveries at $800,000 to $820,000.

The company said it ended the fourth quarter with more than $3 billion of cash and undrawn bank credit facilities and "with no public or bank debt maturities in the next 24 months."