Toll Brothers’ 23Q1 EPS was $1.70, up 38% from 22Q1’s $1.24 and above my estimate of $1.37. Revenues decreased 0.6% to $1.78 billion, below my $1.80 billion. Deliveries of 1,826 units fell 5.3%, but topped my estimate. The average sales price rose 9.5% to $958,100, below my $960,000. Adjusted gross margin of 27.5% was 50 bp above guidance and my estimate. The SG&A expense ratio of 11.9% was down 90 bp from 22Q1 and my estimate.
Net signed contracts fell 50% to 1,461 units in 23Q1, but exceeded my estimate of 1,376. The average order price slipped 2.6% to $1.0 million. Despite the sharp year-over-year decline in orders, backlog is down only 21%, which supports continued strong sales for fiscal 2023.
Management was pleased with the quarter’s performance, which came in at the high end of its guidance ranges across key metrics. Thus, it reaffirmed its full year guidance. Buyer demand has increased markedly since January (through mid-February), beyond normal seasonality. This, management believes, supports its positive long-term outlook for housing. With sufficient land already under control, Toll expects to generate significant cash flow from operations this year.
Based upon management’s guidance and my outlook, I have raised my 2023 EPS estimate to $8.60 (from $8.40 previously) and also my 2024 estimate to $8.01 (from $7.44). Along with other homebuilders, Toll’s stock has significantly outperformed the market since my last report, rising 23% vs. the 2.6% gain in the S&P MidCap 400. At its current price of $62.20, the stock sits just below my price target of $64.00. After such a sharp run-up, the stock is due for a rest. Accordingly, I am reducing my performance rating from “2” (Outperform) to “3” (Neutral).
Valuations for homebuilding stocks have risen significantly over the past year, even as the outlook for 2024 sales and profits has declined. With the stocks now not that far away from historical valuation levels, further improvement in the 2024 outlook for sales and profits will probably be a prerequisite for the rally to continue.
This is a summary of my recent 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.
April 26, 2023
Stephen P. Percoco
Lark Research
839 Dewitt Street
Linden, New Jersey 07036
(908) 975-0250
admin@larkresearch.com
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