Why Toll Brothers Earnings Are Taking the Stock Down

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Toll Brothers Inc. (NYSE: TOL) reported third-quarter fiscal 2017 results before markets opened Tuesday. The luxury homebuilder reported diluted earnings per share (EPS) of $0.87 on revenues of $1.5 billion. In the same period a year ago, Toll Brothers reported EPS of $0.61 on revenue of $1.27 billion. Third-quarter results also compare to consensus estimates for EPS of $0.69 and $1.51 billion in revenue.

The company’s average price for a delivered home decreased from $842,700 in the third quarter a year ago to $791,400. The average price of net signed contracts rose year-over-year from $830,800 to $837,300. Toll Brothers delivered 1,889 units in the quarter and reported 6,282 units in its backlog with an average price per home of $845,100.

Pretax income for the quarter totaled $203.6 million, compared with income of $163.7 million in the year-ago quarter. Toll Brothers wrote down $2.4 million in inventory this year, compared with a write-down of $3.7 million in the year-ago quarter.

Gross margin slipped from 21.9% in the year-ago quarter to 21.7%. Adjusted gross margin for the full year was 25%, down from 25.3% in 2016.

CEO Douglas Yearley said:

Our third-quarter net income increased 41%, revenues rose 18% in dollars and deliveries rose 26% in units, contracts grew 25% in dollars and 24% in units, and backlog increased 21% in both dollars and units, compared to third-quarter FY 2016.  Our expansion in the western markets since 2011, now encompassing California, Washington, Arizona, Nevada, Colorado and Idaho, has helped drive these strong results.

This was our twelfth consecutive quarter of year-over-year growth in contract dollars and units, highlighted by 20% or higher year-over year unit growth in each of the past four quarters.  FY 2017’s third-quarter contracts, in both units and dollars, were the highest third-quarter totals in twelve years. While California and the other western states are leading our growth, backlog, in both dollars and units, was up in all our geographic regions compared to one year ago.

In its guidance for fiscal year 2017, Toll Brothers said it expects annual deliveries of 7,000 to 7,300 new homes with an average price of $800,000 to $850,000. That projects to $5.6 billion to $6.0 billion in sales from a prior range of $5.4 billion to $6.1 billion. Full-year adjusted gross margins are forecast at 24.8% to 25%. The top end of the range was reduced by 0.3 percentage points.

For the fourth quarter, deliveries are pegged at 2,275 to 2,5750 new homes with an average selling price of $840,000 to $860,000.

Analysts estimate fourth-quarter EPS at $1.32 on sales of $2.12 billion. For the full year, the consensus estimates call for EPS of $3.15 and sales of $5.92 billion.

The company’s lower forecast for full-year gross margin and the lowered top-end of the sales estimate are not going to please investors.

Shares traded down about 2% in premarket trading on Tuesday, at $37.50 in a 52-week range of $26.65 to $41.07. The consensus 12-month price target on the stock is $41.19.