Toll Brothers (TOL) 22Q3 Update

Toll Brothers’ 22Q3 EPS was $2.35, up 25.7% from 21Q3’s $1.87 and above my estimate of $2.22.  Revenues increased 10.6% to $2.49 billion, slightly below my projections.  Deliveries of 2,414 units fell 7.1%, more than expected, but the average sales price rose 8.7% to $934,700.  Adjusted gross margin of 27.9% was 90 bp above my estimate and management’s guidance.  The SG&A expense ratio of 10.3%, was down 20 bp from 21Q3 and 10 bp below expectations.

Management attributed the shortfall in deliveries to unforeseen delays in municipal inspections, continued labor shortages, ongoing supply chain disruptions and softer demand.  It lowered its 22Q4 deliveries guidance by 760 units to 4,160 units, but raised its expected average delivery price from $905,000 to $945,000 (at the midpoint of the ranges).

Net signed contracts plunged 60% to 2,414 units in 22Q3, well below projections of a 12% decline.  The average order price surged 39.1% to $1.31 million (or $1.15 million excluding upgrades).  Most of the decline in demand has been in Toll’s affordably luxury segment.

Although deposits on new orders are up in August vs. July, it is still too early to call a bottom.  With the Fed likely to raise the Fed Funds rate to near 4.00% by year-end, mortgage rates will likely rise to or above 6.00%, probably pushing more buyers to the sidelines.

Based upon management’s guidance for 22Q4 and my outlook for 2023, I am reducing my 2022 EPS estimate to $9.28 and my 2023 estimate to $8.75.  With the drop in estimates, I am reducing my price target to $51 (from $64), and maintaining my performance rating at “2” (outperform).  The new PT represents a forward multiple of 5.8 times projected fiscal 2023 earnings of $8.75 and a potential 12-month total return of 13.5% from the current quote.  The forward PT multiple is below the homebuilders’ historical average, but above the group’s current average and therefore implies an improvement in market sentiment about the sector.

This is a summary of my recent update report on Toll Brothers, Inc. (TOL). To obtain a copy of the report, please reach out to me using the contact information provided below.

August 24, 2022

Stephen P. Percoco
Lark Research
839 Dewitt Street
Linden, New Jersey 07036
(908) 975-0250

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