Updated Research Report on Toll Brothers - Analyst Blog

On Mar 27, 2014, we issued an updated research report on Toll Brothers Inc. TOL.

On Feb 25, this luxury homebuilding company reported mixed fiscal first-quarter 2014 results wherein earnings beat the Zacks Consensus Estimate by 39% but revenues missed the same by 3.8%. Adjusted earnings of 25 cents increased significantly from 3 cents in the prior-year quarter on the back of strong margins.

The company reported revenues of $643.7 million, up 52.0% year over year as aggressive pricing made up for weaker orders. However, the company witnessed strong margin expansion on the back of aggressive pricing and increase in operating leverage.

Toll Brothers is optimistic about the upcoming quarters on the back of historically low interest rates, increasing pent-up demand and limited supply of homes. The company expects to deliver 5,100 to 5,850 homes in fiscal 2014 compared to the prior expectation of 5,100 to 6,100 homes. The average price is expected to range between $675,000 and $720,000 per home compared with the prior expectation of $670,000 and $720,000. The company expects fiscal 2014 gross margin to improve 175 to 200 bps over 2013 levels. The company continues to expect community count to remain between 250 and 290 in fiscal 2014.

The positive guidance led to significant upward revision in estimates for this Zacks Rank #3 (Hold) stock. The Zacks Consensus Estimate for fiscal 2014 rose 2.5% and that for 2015 went up 0.4% over the last 30 days.

Overall, we are encouraged by Toll Brothers' aggressive investment in well-positioned land, strong liquidity position and greater pricing power in the luxury housing market. Moreover its acquisition of the homebuilding business of Shapell Industries has strengthened its presence in the upscale Californian housing market. However, the company has been witnessing weakness in orders for some time as the demand for luxury homes has slowed down due to harsh weather. The company also faces difficult year-over-year comparison.

Key Picks from the Sector

Some better-ranked stocks in the homebuilding sector include William Lyon Homes WLH, Taylor Morrison Home Corporation TMHC and DR Horton Inc. DHI. While William Lyon Homes and Taylor Morrison Home Corp. sport a Zacks Rank #1 (Strong Buy), DR Horton carries a Zacks Rank #2 (Buy).