Toll Brothers (TOL) 21Q4 Update

Toll Brothers reported stronger-than anticipated fiscal 21Q4 results that once again exceeded my and the consensus estimates.  Its diluted earnings per share were $3.02, up 95% from $1.55 in 20Q4.  My estimate was $2.51 and the consensus estimate was $2.50.

The company reported $2.95 billion of home sales revenues from the delivery of 3,341 units.  Revenues exceeded management’s guidance but unit deliveries fell short, due mostly to supply chain constraints.  The shortfall in unit deliveries was offset by a higher average selling price.  Home sales gross margin was 23.5%, up 340 bp, and the home SG&A expense ratio was 8.8%, down 110 bp.  Net signed contracts decreased by 13.2% in units, but increased by 9.5% in dollar value.  Average contract prices surged by 26.9%, due in part to a mix shift.  Despite the unit decline, management said that the pace of sales been strong and steady in recent months.

Management’s guidance anticipates fiscal 2022 deliveries of 11,750 units at an average price of $885,000 (both at the midpoint of the range) along with a 300 bp improvement in adjusted gross margin and a 50 bp reduction in the SG&A expense ratio.  Combined, this translates into projected diluted earnings per share of $9.84, according to my projections, up 48.4% from fiscal 2021.  This guidance does not anticipate improvement in labor and materials costs.

Despite my higher fiscal 2022 earnings projection, I am reducing my performance rating to neutral, based upon the recent surge in Toll’s share price.  The stock is now overbought, technically speaking.  I am resetting my price target to $72, equal to the current price, but above my previous target of $65.  After a correction (or consolidation) in price, if Toll achieves the soft landing that I anticipate and delivers on its fiscal 2022 guidance, the stock should have further upside potential.

This is a summary of my recent update report on Toll Brothers, Inc. (TOL). To receive the report, please contact me.

December 10, 2021

Stephen P. Percoco
Lark Research
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