Toll Brothers Beefs Up Estimates, Sees Yearly Revenues Up 40%

Toll Brothers Inc. (NYSE: TOL) reported third-quarter fiscal 2014 results before markets opened Wednesday. The luxury homebuilder reported quarterly diluted earnings per share (EPS) of $0.53 on revenues of $1.06 billion. In the same period a year ago, Toll Brothers reported EPS of $0.26 on revenue of $689.16 million. Third-quarter results also compare to the Thomson Reuters consensus estimates for EPS of $0.45 and $987.24 million in revenue.

The company has been able to bolster its average price for a delivered home from $651,000 in the third quarter a year ago and $706,000 in the prior quarter to $732,000. The average price of net signed contracts slipped sequentially from $729,000 to $717,000, compared with $707,000 in the 2013 third quarter.

Gross margin improved from 23.6% in the year-ago quarter to 26.8% in the third quarter of 2014.

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The company’s CEO said:

We are encouraged by our traffic, which was up 13% on a per community basis for the quarter compared to FY 2013. … Although we have seen some lessening of pricing power in the past year, we have not felt the need to incentivize to spur home sales. … We have been particularly pleased with our performance in a number of the markets we have targeted for growth, especially Coastal California, Texas, and the urban New York City area. … With pent-up demand still yet to be unleashed, we are growing community count in attractive locations. … Our Apartment Living division is ramping up. In addition to two completed joint venture communities comprised of 1,450 units, we currently have five joint ventures with more than 1,900 units under construction plus another 2,550 units in the approval pipeline.

Toll Brothers narrowed its guidance and now says the company expects to deliver between 5,300 and 5,500 new homes during its 2014 fiscal year at an average delivered price between $710,000 and $725,000 each. The prior estimates called for deliveries in a range of 5,100 to 5,850 in a price range of $690,000 and $720,000 per house.

Given those estimates, the company forecasts full-year revenue between $3.76 billion and $3.99 billion, up from 2013’s actual revenue of $2.67 billion on sales of 4,184 homes. The company raised its gross margin growth forecast from 175 to 200 basis points to a new range of 185 to 200 basis points.

The company’s executive chairman also noted:

One data point we do have confidence in is the low level of production compared to historic norms. Population grew during the recession and has continued to increase since then. Based on trends over more than forty years, the industry should be building 50% more homes this year than its current pace to meet the increased population demographics.

Whether or not that historical pattern eventually will emerge is not yet a decided issue. The U.S. economy has grown in fits and starts since the end of the Great Recession, and if the second estimate on GDP holds up, growth has returned to historical averages. More than anything that could dictate the future for homebuilders.

Shares were up about 0.9% in premarket trading Wednesday, at $35.94 in a 52-week range of $29.64 to $39.95 Thomson Reuters had a consensus analyst price target of around $39.50 before the results were announced.

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