Can Toll Brothers (TOL) Pull A Surprise In Q3 Earnings?

Toll Brothers Inc. (NYSE:TOL) is slated to report third-quarter fiscal 2017 results on Aug 22, before the opening bell.

Last quarter, the company’s earnings surpassed the Zacks Consensus Estimate by 17.7%. The company surpassed expectations in two of the last four quarters, the average being 1.13%.

Let’s see how things are shaping up prior to this announcement.

Factors to Consider

A look at estimate revisions lends us an idea of analyst expectations right before a company’s earnings release. The Zacks Consensus Estimate for fiscal third-quarter earnings has been stable at 68 cents per share in the past 60 days. This reflects a year-over-year increase of 9.9%. Further, analysts polled by Zacks expect revenues of $1.48 billion for the said quarter, reflecting a 16.6% increase from a year ago.

Strong housing demand and lack of competition in the luxury new home market are expected to drive revenues in the quarter under review. The company mostly caters to luxury move up buyers, who already possess a residence and are looking for a shift to larger homes. These homebuyers are less sensitive to price changes. Toll Brothers enjoys greater pricing power than other homebuilding companies.

Given the significant pent-up housing demand, Toll Brothers has secured some of the most sought-after urban locations in the country, where land is scarce and approvals are not easy to obtain. The company’s solid land position places it well to meet growing demand, thus giving it a competitive edge over its peers who are presently facing land availability constraints.

However, we are concerned about the rising building materials and labor costs.

The company expects home deliveries between 1,675 and 1,975 units in the third quarter of fiscal 2017 (more than 1,507 units reported in the prior year quarter) at an average price of $790,000 to $815,000 (less than $843,000 in the prior-year quarter). Adjusted gross margin in the fiscal third quarter is expected to improve 10 basis points, same as in the prior-year quarter. Third-quarter fiscal 2017 SG&A expenses are estimated at approximately 10.4% of revenues, less than 10.6% in the prior-year quarter.

Earnings Whispers

Our proven model does not conclusively show that Toll Brothers is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here as you will see below.

Zacks ESP: Toll Brothers has an Earnings ESP of 0.00% as both the Most Accurate estimate and the Zacks Consensus Estimate are pegged at 68 cents. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Toll Brothers Inc. Price and EPS Surprise

Zacks Rank: Toll Brothers has a Zacks Rank #2, which increases the predictive power of ESP. However, the company’s 0.00% ESP makes surprise prediction difficult.

Meanwhile, we caution against stocks with a Zacks Ranks #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are some companies in the Construction sector that, according to our model, have the right combination of elements to post an earnings beat:

TopBuild Corp. (NYSE:BLD) has an Earnings ESP of +1.59% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Energy Focus, Inc. (NASDAQ:EFOI) has an Earnings ESP of +10.11% and a Zacks Rank #2.

Summit Materials, Inc. (NYSE:SUM) has an Earnings ESP of +3.02% and a Zacks Rank #3.

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