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Toll Brothers (TOL) Q2 Earnings Top, Recent Orders Improve

Zacks Equity Research

Toll Brothers, Inc.'s TOL shares gained more than 8% in the after-hour trading session, following its second-quarter fiscal 2020 earnings release. The company’s earnings in the quarter topped the Zacks Consensus Estimate but revenues missed the same. Although COVID-19 impacted its order trends from Mar 16 to Apr 30, the recent trends observed by Toll Brothers suggest that “the housing market may be more resilient than anticipated just two months ago.”

Douglas C. Yearley, Jr., chairman and chief executive officer, said, “Our deposits, which typically precede a binding sales contract by about three weeks and represent a leadingindicator of current market demand, were up 13% over the past three weeks versus the same three-week period last year. Importantly, our recent deposit-to-contract conversion ratio has remained consistent with pre-Covid-19 levels. Web traffic hasalso steadily improved from the lows we experienced in mid-March and has returned to the same strong activity we enjoyedpre-Covid-19 in February.”

Earnings & Revenue Discussion

The country's leading luxury homebuilder reported earnings of 59 cents per share in the quarter under review, beating the consensus mark of 48 cents by 22.9%. However, the said figure dropped 32.2% from the year-ago level of 87 cents as a result of lower revenues, higher SG&A expenses and reduced margins.

Consolidated revenues of $1.55 billion lagged the consensus mark of $1.56 billion by 0.8%. The reported figure also decreased 9.7% year over year due to lower average selling prices.

Toll Brothers Inc. Price, Consensus and EPS Surprise

Toll Brothers Inc. Price, Consensus and EPS Surprise

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

Segment Detail

Toll Brothers operates under two reportable segments, namely Traditional Home Building and Urban Infill ("City Living").

Revenues from Traditional Home Building declined 9% year over year to $1.48 billion and that of City Living decreased 56.2% to $36.8 million during the quarter.

Inside the Headline Numbers

Homebuilding deliveries during the quarter were up 1% year over year to 1,923 units. Deliveries increased in all the regions served by the company, except North and Pacific. Deliveries in Citi Living declined to 29 units from 72 units a year ago.

The average price of homes delivered was $788,500 in the quarter, down 12% from the year-ago level of $895,900.

The number of net signed contracts or orders during the reported quarter was 1,886 units, down 22% year over year. The value of net signed contracts was $1.55 billion, reflecting a 22% decrease from the year-ago quarter. Notably, 40% of the company’s selling communities and 50% of the dollar value of backlog were concentrated in highly-impacted markets. From Mar 16 through Apr 30, Toll Brothers’ net signed contracts declined 64% year over year.

At fiscal second quarter-end, it had a backlog of 6,428 homes, representing a 1% year-over-year decrease. Potential revenues from backlog also declined 3% year over year to $5.49 billion.

Cancellation rate during the reported quarter was 9.7%, reflecting an increase from 5.3% in the prior-year period.

Margins

The company's adjusted home sales gross margin was 21%, which contracted 250 basis points (bps) in the quarter.

SG&A expenses — as a percentage of home sales revenues — were 11.8%, up 140 bps from the year-ago quarter. Operating margin of 6% was down 340 bps in the quarter.

Financials

Toll Brothers had $741.2 million cash and cash equivalents as of Apr 30, 2020 compared with $1.29 billion at fiscal 2019-end and $519.8 million at fiscal first quarter-end.

During the first half of the fiscal second quarter, the company repurchased 4.3 million shares for a total purchase price of $157.5 million.

At fiscal second quarter-end, it had $2 billion of liquidity that included $741.2 million of cash and marketable securities, and $1.3 billion available under the $1.9-billion revolving credit facility. Notably, this facility will mature in November 2024. The company has no significant debt maturities until February 2022.

Owing to business disruptions and unprecedented impact of the COVID-19 pandemic on the U.S. economy, the company revoked its fiscal 2020 guidance.

Zacks Rank

Toll Brothers — which shares space with PulteGroup Inc. PHM, NVR, Inc. NVR and D.R. Horton, Inc. DHI in the Zacks Building Products - Home Builders industry — currently carries a Zacks Rank #4 (Sell).

You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

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