Toll Brothers (TOL) Q3 Earnings Lag, Stock Up On Sales Beat

Shares of Toll Brothers Inc. (NYSE:TOL) rose almost 8% on Aug 23 as the homebuilding company reported robust revenue results for the third quarter of fiscal 2016.

Toll Brothers’ third quarter adjusted earnings of 62 cents per share missed the Zacks Consensus Estimate of 63 cents by 1.6%. Adjusted earnings however surged year over year driven by higher revenues, lower share count and gross margin.

The company reported revenues of $1.27 billion in the fiscal third quarter, beating the Zacks Consensus Estimate of $1.25 billion by 1.6%. Revenues increased 24% year over year driven by higher average selling prices (ASPs) and home deliveries.

Quarter Detail

Toll Brothers offers homes under two segments, namely Traditional Home Building Product and City Living. Traditional Home Building revenues were $1.22 million, up 25.8% year over year, driven by higher ASPs and deliveries. However, City Living reported revenues of $52.5 million, down 13.2% from the prior year quarter.

Consolidated homebuilding deliveries increased 6% year over year to 1,507 units. Deliveries increased 11.5% in the Traditional Home Building segment but decreased around 82.5% in the City Living division.

Average price of homes delivered was $843,000, up 16.4% year over year. At the end of fiscal third-quarter 2016, community count was 297, up 11.2% year over year.

The number of net orders signed was 1,748 units in the fiscal third quarter, up 18% year over year. Value of net orders signed during the quarter was $1.45 billion, up 18% year over year.

At the end of the reported quarter, Toll Brothers had a backlog of 5,181 homes, up 17% year over year. Potential housing revenues from backlog grew 19% year over year to $4.37 billion, primarily attributable to an increase in average prices of backlog.

Adjusted gross margin (excluding write-downs and interest) increased 10 basis points (bps) to 25.3% due to lower expenses and strong revenues. As a percentage of revenues, SG&A expenses improved 70 bps to 10.6%.

Operating margin increased 280 bps year over year to 11.3% due to higher gross margins and improved SG&A ratio.

Fourth Quarter Outlook

Toll Brothers expects to deliver between 2,025 and 2,325 units in the fourth quarter of 2016, with an average expected price range between $815,000 and $835,000.

Fiscal 2016 Outlook

Toll Brothers expects revenues between $4.96 billion and $5.27 billion compared with the prior expectation of $4.76 billion and $5.36 billion in fiscal 2016. The home deliveries guidance was tightened to a range of 5,900 and 6,200 homes from the prior expected range of 5,800 and 6,300. The company expects the average price of homes delivered to be between $840,000 and $850,000 compared with the prior expectation of $820,000 and $850,000.

The company expects its joint venture and other income between $88.5 million and $93.5 million, lower than the prior expectation of $105 million to $130 million. Gross margin is expected in the range of 25.6% and 25.8%, compared with the prior expected range of 25.8% to 26.2%. The company expects to end fiscal 2016 with 305 to 315 communities.

TOLL BROTHERS Price, Consensus and EPS Surprise

TOLL BROTHERS Price, Consensus and EPS Surprise | TOLL BROTHERS Quote

Toll Brothers carries a Zacks Rank #3 (Hold).

Stocks to Consider

Better-ranked stocks in the construction sector include MDC Holdings Inc. (NYSE:MDC) , PulteGroup, Inc. (NYSE:PHM) and TRI Pointe Group, Inc. (NYSE:TPH) . All the three companies sport a Zacks Rank #1 (Strong Buy).