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Factors Likely to Shape Toll Brother's (TOL) Q2 Earnings

Zacks Equity Research

Toll Brothers Inc. TOL is scheduled to report second-quarter fiscal 2020 results (ended Apr 30, 2020) on May 27, after the closing bell.

In the last reported quarter, the company’s earnings and revenues lagged the respective Zacks Consensus Estimate by 8.9% and 6.7%. Earnings and revenues of this homebuilding company also dropped 46.1% and 2.3%, respectively, from the year-ago reported figures.

Markedly, Toll Brothers reported better-than-expected earnings in three of the last four quarters, with the average surprise being 8.8%.

Trend in Estimate Revision

The Zacks Consensus Estimate for the to-be-reported quarter’s earnings has declined 4% to 48 cents per share over the past 30 days. This indicates a 44.8% decrease from the year-ago earnings of 87 cents per share. The consensus mark for revenues is $1.56 billion, suggesting a 9% year-over-year decline.

Toll Brothers Inc. Price and EPS Surprise


Toll Brothers Inc. Price and EPS Surprise


Toll Brothers Inc. price-eps-surprise | Toll Brothers Inc. Quote


Factors to Consider

This luxury homebuilding company is expected to have witnessed a decline in earnings year over year due to lower revenues and margins. A combination of delayed deliveries, unfavorable mix, and additional closeout costs related to certain older communities have been impacting the company’s performance.

Additionally, during the fiscal first-quarter earnings call, Toll Brothers highlighted that the coronavirus outbreak in China led to shortage of lighting fixtures and small appliances, prompting it to delay the sale of 11 homes in California, which is one of its biggest markets. Now, as the outbreak has taken the shape of a global crisis, material supply chain disruptions are expected to have impacted construction sites and development pipelines.

Due to business disruption and the evolving impacts of the COVID-19 pandemic on the U.S. economy, the company has revoked its fiscal second quarter and full-year 2020 guidance that was previously issued on Feb 25, 2020.

Meanwhile, gross-margin related woes are expected to get reflected in its fiscal second-quarter results. During the fiscal first-quarter earnings call, the company highlighted that adjusted gross margin for the fiscal second quarter is expected to be impacted by the challenging average sales price.

Notably, from late 2018 till July 2019, the company had to opt for modest pricing to combat affordability woes of homebuyers, owing to high interest rate environment. In its newly formed Pacific region, which includes California, Portland, and Seattle, contracts and dollars did not turn positive until first-quarter fiscal 2020. Although Toll Brothers has been working to lower margin-related woes, gross margin is expected to decline owing to the above-mentioned headwinds.

Also, continued pressure on SG&A expense is expected to have weighed on its bottom line in the quarter. In order to mitigate top-line related woes, the company has been making investments that comprise implementation of IT system upgrades. This is causing increased SG&A, as a percentage of revenues.

What the Zacks Model Says

Our proven model does not conclusively predict an earnings beat for Toll Brothers this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat. This is not the case here, as you will see below.

Earnings ESP: Toll Brothers has an Earnings ESP of -13.28%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: It currently carries a Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank stocks here.

Peer Releases

D.R. Horton, Inc. DHI reported mixed results in second-quarter fiscal 2020, wherein earnings topped the Zacks Consensus Estimate but revenues lagged the same.

KB Home KBH reported impressive results in first-quarter fiscal 2020 (ended Feb 29, 2020). Earnings and revenues topped the respective Zacks Consensus Estimate, and registered notable improvement on a year-over-year basis.

PulteGroup Inc. PHM reported first-quarter 2020 results, wherein earnings surpassed the Zacks Consensus Estimate but revenues lagged the same. Higher demand owing to favorable housing dynamics in most part of the quarter, backed by lower interest rates and improved affordability, had a positive impact on PulteGroup’s performance.

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