Toll Brothers (TOL) 22Q4 Update

Toll Brothers reported fiscal 22Q4 results that were much stronger than I anticipated.  22Q4 diluted earnings per share were $5.63 up 86% from $3.02 in 21Q4 and better than my estimate of $3.93.  Excluding a $140 million (estimated $0.94 per share) gain on a legal settlement, adjusted EPS of $4.69 was still well ahead of last year and my estimate.

The company reported 22Q4 home sales revenues of $3.58 billion from the delivery of 3,765 units.  Deliveries exceeded the high end of management’s guidance of 3,250-3,550 units (and my estimate of 3,400 units), despite supply chain constraints that are continuing, though easing.  Adjusted home gross margin was 29.0%, up 340 bp, and the home SG&A expense ratio was 7.2%, down 160 bp.  Net signed contracts plunged 59.9% in units and 56.0% in dollar value.  Average contract prices rose 9.7%, due in part to a mix shift.  Management said that the pace of sales has been stable for several months.

Supported by its still high end-of-year backlog, management’s fiscal 2023 guidance anticipates deliveries of 8,000-9,000 units at an average price of $965,000-$985,000 along with only a modest 50 bp decline in adjusted home gross margin to 27% and a 150 bp increase in the home SG&A expense ratio to 11.4%.  Combined, this translates into diluted earnings per share of $8.40, according to my fiscal 2023 projections, down 22.9% from 2022.  For fiscal 2024, I am currently projecting diluted EPS of $7.44.

Despite the projected decline in earnings, I am raising my performance rating to “2” outperform, based upon the recent evidence that home sales and mortgage rates are stabilizing and the outperformance of homebuilding stocks vs. the broader market since April.  I am raising my 12-month price target on the stock from $51 to $56, which equates to 7.5 times projected fiscal 2024 EPS of $7.44.  Together with the stock’s 1.6% dividend yield, the revised price target represents a potential total return of about 15%.

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

December 29, 2022

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

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