Toll Brothers Posts Blowout Profits, But Don’t Sound an All-Clear for Housing

by Dan Burrows | May 28, 2014 12:00 pm

Outside of a financial crisis of historical proportions, you can’t really go wrong selling stuff to rich people.

Toll Brothers Just look at luxury homebuilder Toll Brothers (TOL[1]), which reported soaring quarterly profits despite a slowdown in the housing market.

Rising mortgage rates and weaker housing data were pointing to housing market weakness ever before brutal winter weather gripped so much of the country earlier this year. That tampered the outlook for homebuilders, which have cooled off substantially after reaping the rewards of a big bounce back in 2011 and 2012.

But those fears appear to be unfounded — at least for high-end homebuilders — as Toll Brothers beat analysts’ fiscal second-quarter estimates for both earnings and revenue. It also should allay some anxiety felt by anyone holding TOL stock, which is on its way to breakeven for the year-to-date on the surprisingly strong earnings and outlook.

For the three months ended April 30, Toll Brothers said profit more than doubled by a wide margin, jumping 164% to $65.2 million, or 35 cents a share, from $24.7 million, or 14 cents a share, in the year-ago period. Analysts surveyed by Thomson Reuters projected earnings of just 26 cents a share.

In more good news for TOL stock, the top line rose sharply to likewise eclipse Street estimates by a wide margin. Revenue increased 67% to $860.4 million. Analysts were looking for revenue of $828 million.

Toll Brothers Not Necessarily a Bellwether

It’s unclear how much of the good fortune at Toll Brothers extends to the broader collection of homebuilders. After all, Toll Brothers sells homes with an average price of $706,000, up from $577,000 a year ago. Indeed, the strong quarter was driven by price and volume gains.

But most rival homebuilders’ customers aren’t looking to spend anywhere near that level.

Furthermore, Toll Brothers — and TOL stock — benefits from building in the wealthy corridor from Boston to Washington, D.C. Toll Brothers also is developing condos-for-sale projects in the affluent New York City/northern New Jersey area, as well as Philadelphia.

By catering to the wealthy, Toll Brothers is able to enjoy rapid price escalation even as national home prices rise much more slowly.

On the other hand, housing recoveries tend to ebb and flow, according to Toll Brothers CEO Douglas C. Yearley Jr., so the slowdown may just be a normal pause for the market and the homebuilders. As Yearley said in a media release:

“We note that last cycle’s recovery, in the early 1990s, began with a period of rapid acceleration, followed by leveling, before further upward momentum. We believe that we are in a similar leveling period in the early stages of the housing recovery with significant pent-up demand building.”

Even if that’s the case, and there’s more upside for the housing market and homebuilders ahead, that doesn’t make Toll Brothers’ shares a buy on the latest news. TOL stock was already trading at a 26% premium to its competitors on a forward earnings basis, according to data from Thomson Reuters Stock Reports, so today’s good news appears to have been more than reflected in the stock’s price.

Toll Brothers might be too pricey to add to any position here, but the future looks bright enough that you sure wouldn’t want to sell it, either.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

  1. TOL:

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