Toll Brothers (TOL) Down 11.8% Since Last Earnings Report: Can It Rebound?

A month has gone by since the last earnings report for Toll Brothers (TOL). Shares have lost about 11.8% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Toll Brothers due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Toll Brothers Q2 Earnings & Revenues Top

Toll Brothers, Inc. reported impressive results in second-quarter fiscal 2022 (ended Apr 30, 2022). Both top and bottom line topped the Zacks Consensus Estimate and increased on a year-over-year basis.

Douglas C. Yearley, Jr., chairman and chief executive officer, said, “While demand is still solid, over the past month it has moderated from the unprecedented pace of the past two years as buyers adapt to higher mortgage rates and other macro-economic conditions. However, the many fundamental drivers of housing demand remain firmly in place. These include favorable demographics, the significant imbalance between the supply and demand for homes, and migration trends. We believe these factors will support a healthy housing market over the long term.”

Earnings & Revenue Discussion

This Fort Washington, PA-based homebuilder reported earnings of $1.85 per share, which handiliy beat the Zacks Consensus Estimate of $1.46 by 26.7% and increased a whopping 83.2% from the year-ago period.

Total revenues (including Home sales, and Land sales and other) came in at $2.28 billion, which beat the consensus mark of $2.05 billion by 11.1% and rose 18% year over year. The uptrend was backed by higher deliveries and pricing during the quarter.

Segment Detail

Toll Brothers operates under two reportable segments, namely Traditional Home Building and Urban Infill (City Living). Revenues from Traditional Home Building totaled $2.17 billion, up 22% year over year and that of City Living decreased 69% to $18 million.

Inside the Headline Numbers

Home sales revenues grew 19.1% from the prior-year quarter to $2.19 billion. Homes delivered grew 6% year over year to 2,407 units. Deliveries increased in South, Mountain and Pacific regions served by the company. The average price of homes delivered was $908,400 for the quarter, up from the year-ago level of $808,600.

The number of net signed contracts for the reported quarter was 2,874 units, down 17.6% year over year. The value of net signed contracts was $3.1 billion, reflecting a rise of 1% from the year-ago quarter.

At fiscal second-quarter end, Toll Brothers had a backlog of 11,768 homes, representing a 16% year-over-year increase. Also, potential revenues from backlog improved 35% year over year to $11.7 billion. The average price of homes in backlog totaled $994,700, up from $860,100 at the end of second-quarter fiscal 2021. Cancellation rate (as a percentage of signed contracts) for the reported quarter was 3.8% compared with 4% in the prior-year period.

Margins

The company’s adjusted home sales gross margin was 26.1%, expanding 170 basis points for the quarter. SG&A expenses — as a percentage of home sales revenues — were 11.1%, which decreased from 11.9% in the year-ago quarter.

Financials

Toll Brothers had cash and cash equivalents of $535 million at fiscal second-quarter end compared with $1.64 billion at fiscal 2021-end. At fiscal second-quarter end, it had $1.8 billion available under the $1.9 billion bank revolving credit facility, scheduled to mature in November 2026.

Total debt at fiscal second-quarter end was $3.30 billion, down from $3.56 billion at fiscal 2021-end but up from $3.24 billion at fiscal first-quarter end. Debt to capital was 38.1% at fiscal second-quarter end versus 40.2% at fiscal 2021-end. During the quarter, the company repurchased 2.2 million shares of its common stock at an average price of $48.30 per share for approximately $106.5 million.

Fiscal Third-Quarter Guidance

Toll Brothers expects home deliveries of 2,750 units (indicating a rise from 2,597 units delivered in the prior-year quarter) at an average price of $895,000-$915,000 (suggesting a rise from $860,400 a year ago). Adjusted home sales gross margin is expected to be 27%, implying an increase from 25.6% in the year-ago period. SG&A expenses are estimated to be 10.5% of home sales revenues, indicating no change from the year-ago period. The company expects the effective tax rate to be 26%.

Fiscal 2022 Guidance

For fiscal 2022, home deliveries are anticipated to be 11,000-11,500 units (versus 11,250-12,000 units expected earlier) at an average price of $890,000-$910,000 (versus $875,000-$895,000 of earlier projection). Toll Brothers expects adjusted home sales gross margin of 27.5% compared with 25% reported in fiscal 2021. SG&A expenses, as a percentage of home sales revenues, for fiscal 2022 are projected to be 10.4% versus 10.5% projected earlier. The expected figure indicates a fall from 10.9% reported in fiscal 2021.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month.

The consensus estimate has shifted -20.49% due to these changes.

VGM Scores

At this time, Toll Brothers has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. Charting a somewhat similar path, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Toll Brothers has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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