Toll Brothers' Earnings: What Wall Street's Saying

NEW YORK (TheStreet) -- Toll Brothers's (TOL) fiscal-third quarter results came in above Wall Street expectations, but analysts were concerned about the luxury homebuilder's future orders.

Shares were down 2.9% to $34.60 on Wednesday.

Toll reported fiscal third-quarter profit of $97.7 million, or 53 cents a share, up from a year-earlier $46.6 million, or 26 cents a share. Toll, the largest U.S. luxury homebuilder, said revenue rose 53% to $1.06 billion after selling 1,444 homes in the third quarter compared with 1,059 a year earlier. Toll said the average selling price rose 12% to $732,000 compared to $651,000 in the year-earlier quarter.

Net signed contracts of 1,324 units decreased 6% from last year. On a per-community basis, though, the quarter's net signed contracts of 5.25 units "was the second highest per-community third quarter total since FY 2006," the company said.

Consensus called for the Horsham, Pa.-based company to earn a quarterly profit of 45 cents a share on revenue of $987.2 million. 

Here's what analysts are saying about Toll Brothers.

Eli Hackel, Goldman Sachs (Neutral; price target under review)

While the results beat ours and Street estimates, we are concerned by the weakness shown in new orders (decline of -5.8% yoy vs. our estimate of +11.3%), and community count (-16.5% vs. our estimate of -2.3%). Management revised FY14 estimates and now the community count guidance mid-point goes down to 265 communities (from 270 communities earlier) while the deliveries guidance mid-point goes to 5,400 from 5,475 earlier. Gross margins guidance improved to 185 - 200bps yoy growth from 175-200bps earlier.

August trends showed absorptions down 19% but non-binding deposits per community is up 4%. We are not yet willing to read too much into this given this is a slower seasonal time and it would indicate orders may not turn positive until October potentially. In addition, management commentary was reserved. That being said if absorptions stay positive, the trajectory heading into the end of the year could be better than our initial estimates as we currently model absorptions down through the year.

David Goldberg, UBS (Neutral; $35 PT)

Reflecting F3Q performance, we're raising our F14E EPS to $1.90 from $1.85. That said, given backlogs, community count expectations and waning pricing power, we're reducing our F15E EPS to $2.10 from $2.30. Forward years remain unchanged. That said, this change is not significant enough to affect our $35 PT. Further, while Toll is well positioned to gain share and drive faster EPS growth relative to peers, we think this is already reflected in the current valuation.

We have long posited that Toll is among the best positioned builders for the upturn, driven by its: 1) ability to gain greater share from capital constrained private builders, given its high end focus; 2) product diversity; and 3) expertise in acquiring better positioned lots whose value should rise more quickly in a recovery. Despite our optimism, we remain on the sidelines awaiting a better entry point, as we believe the current valuation incorporates significant top-line expansion and profitability expectations near prior peaks. We expect that this will be difficult to achieve if the recovery moderates, reflecting the impact of weakening affordability and tighter lending standards.

Michael Roxland, Bank of America Merrill Lynch (Buy; $49 PT)

The performance was largely driven by pricing, with average delivered prices increasing 12% y/y (2% higher than we were forecasting). This continued pricing strength led the company to increase its expected 2014 average delivered price to $710-725k from a previous $690-720k. The quarter also benefited from higher Other Income and Income from unconsolidated entities, which added around $0.02 to our model. That said, volumes were weaker than forecast, with deliveries lower than our estimate by 5% and orders below our estimate by 15%. (In fairness, orders were up against tough comps, increasing around 26% y/y in F3Q13.) In F3Q, TOL's cancellation rate increased to 6.6% vs. 3.7% in F2Q, though this is in line with TOL's average F3Q cancellation rate of 6.3% since 2009. Overall, the company narrowed its F2014 delivery guidance to 5,300-5,500 homes from a previous range of 5,100-5,850. We had been modeling deliveries of 5,390.

Michael Rehaut, J.P. Morgan (Underweight; $34.50 PT)

We expect a roughly neutral reaction by the stock today, as while EPS was solidly above our estimate and the Street, orders were well below our estimate and we believe Street expectations.

We maintain our relative Underweight rating, as we believe the company's solid fundamentals are more than reflected by its expensive valuation, in our view, trading at 10.4x our 2016E EPS, well ahead of its larger-cap peers.

TheStreet Ratings team rates TOLL BROTHERS INC as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:

"We rate TOLL BROTHERS INC (TOL) a BUY. This is driven by some important positives, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its robust revenue growth, largely solid financial position with reasonable debt levels by most measures, increase in net income, good cash flow from operations and growth in earnings per share. We feel these strengths outweigh the fact that the company has had somewhat disappointing return on equity."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • TOL's very impressive revenue growth greatly exceeded the industry average of 5.5%. Since the same quarter one year prior, revenues leaped by 64.5%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • The debt-to-equity ratio is somewhat low, currently at 0.94, and is less than that of the industry average, implying that there has been a relatively successful effort in the management of debt levels.
  • The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Household Durables industry. The net income increased by 164.3% when compared to the same quarter one year prior, rising from $24.67 million to $65.22 million.
  • Net operating cash flow has significantly increased by 231.96% to $184.20 million when compared to the same quarter last year. Despite an increase in cash flow, TOLL BROTHERS INC's cash flow growth rate is still lower than the industry average growth rate of 252.28%.
  • TOLL BROTHERS INC reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, TOLL BROTHERS INC reported lower earnings of $0.97 versus $2.79 in the prior year. This year, the market expects an improvement in earnings ($1.72 versus $0.97).
--Written by Laurie Kulikowski in New York.

Follow @LKulikowski

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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