Toll Brothers (TOL) 23Q1 Update

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

© 2015-2024 by Stephen P. Percoco, Lark Research.   All rights reserved.

This blog post (as with all posts on this website) represents the opinion of Lark Research based upon its own independent research and supporting information obtained from various sources. Although Lark Research believes these sources to be reliable, it has not independently confirmed their accuracy. Consequently, this blog post may contain errors and omissions. Furthermore, this blog post is a summary of a recent report published on this subject and that report provides a more complete discussion and assessment of the risks and opportunities of any investment securities discussed herein. No representation or warranty is expressed or implied by the publication of this blog post. This blog post is for informational purposes only and shall not be construed as investment advice that meets the specific needs of any investor. Investors should, in consultation with their financial advisers, determine the suitability of the post’s recommendations, if any, to their own specific circumstances. Lark Research is not registered as an investment adviser with the Securities and Exchange Commission, pursuant to exemptions provided in the Investment Company Act of 1940. This blog post remains the property of Lark Research and may not be reproduced, copied or similarly disseminated, in whole or in part, without its prior written consent.

This entry was posted in Consumer Discretionary, Housing, TOL and tagged . Bookmark the permalink.