High-end homebuilder Toll Brothers Inc. (NYSE:TOL) reported much better-than-expected earnings and increased outlook for the remainder of 2015.
TOL stock jumped by more than 4% on the news and helped lift other homebuilders such as Lennar Corporation (NYSE:LEN) up almost 3%, D.R. Horton Inc. (NYSE:DHI) up almost 2%, and KB Home (NYSE:KBH) up more than 3%.
Investors had been concerned about the homebuilders leading up to Toll Brothers’ release after the National Association of Homebuilders recent data release indicating existing homes sales had fallen 4.9% month-over-month in January, hitting their lowest level in over nine months.
The NAB pointed to a lack of new affordable housing as a main reason for the drop in sales. But, since Toll Brothers focuses on more of the high-end side of housing, it’s unlikely to see many of the same problems the rest of the industry is experiencing.
Toll Brothers Earnings
Revenue for the first quarter came in at $853.5 million, well above the $773.5 million analysts had been expecting and 33% higher than what Toll Brothers posted in the same quarter last year. As for earnings, Wall Street was expecting 30 cents per share of TOL stock, but Toll Brothers easily topped that number with 44 cents.
The company delivered 1,091 units during the quarter at an average price of $782,300 while signed contracts for the three months were 1,063 at an average price of $821,500. In the first quarter of 2014, the average delivery price was just $693,000 while the signed contract price was only $766,100.
Toll Brothers is clearly showing signs that not only can it continue to sell home at a sold rate, but more importantly they can increase prices without hurting demand.
This increase in pricing helped the company increase gross margins from 24.4% last year to 27.3%. Management is also encouraged by the strong jobs markets and wage data, as they believe it will allow consumers to spend more money on housing which will further spur the industry as a whole.
Looking forward, Toll Brothers had several positive points:
- TOL increased its 2015 guidance for deliveries from a range of 5,000 to 6,000 units upward to a range of 5,200 to 6,000 units.
- Management believes the average price of those homes will come in between $725,000 to $760,000, a higher estimate than the previously given $710,000 to $760,000 range.
- Lastly, management confirmed that it believes gross margins for the year will come in at around 26%, up from the 25% it posted in 2014.
Bottom Line
These numbers all look terrific. Toll Brothers seems to be firing on all cylinders right now and if it can hit estimates for 2015, TOL stock will certainly end the year higher than it is today.
But Toll Brothers (and the other homebuilders) all have a day of reckoning coming — the day when interest rates begin to creep higher. Regardless of whether Toll Brothers is a high-end homebuilder or low-end, when interest rates jump, housing instantly becomes more expensive. This likely will hurt demand, which could cause builders to reduce prices and see lower gross margins.
Buying Toll Brothers today looks like a good bet and seems to be in a better market position than the other homebuilders, but if you do own the company, keep an eye on the Federal Reserve and what interest rates are doing.
As of this writing, Matt Thalman did not hold a position in any of the aforementioned securities.
