Toll Brothers (TOL) 23Q2 Update

Toll Brothers’ 23Q2 EPS was $2.85, up 54% from 22Q2’s $1.85 and above my estimate of $1.87.  Revenues increased 10.1% to $2.51 billion and exceeded my estimate of $2.17 billion.  Deliveries of 2,492 units increased 3.5% exceeding management’s guidance.  The average sales price rose 10.0% to $999,200, above my estimate of $990,000.  Adjusted gross margin of 28.3% was 130 bp above guidance and my estimate.  The SG&A expense ratio of 9.1% was down 160 bp from 22Q2.

Net signed contracts fell 18.8% to 2,333 units in 23Q2, but exceeded my estimate of 2,064.  The average order price declined 9.3% to $975,200.  The ending backlog was down 35.6% in units and 28.4% in dollar value.

Toll Brothers has made great strides in delivering out its backlog, shortening its cycle time considerably from the historical average.  Supply chain constraints, which had held back deliveries over the past two years, have substantially receded.  Margins have also benefited from cost-saving initiatives, selective price increases and demand for custom options.  Despite the exceptionally strong results, however, most of the improvement in financial performance appears to be attributable to catching up on the backlog.  Orders were still down double-digits year-over-year and while favorable comparisons in 23H2 should help moderate YOY percentage order declines (or even produce gains), the company is likely to begin fiscal 2024 with a much smaller backlog, which will make it difficult to replicate this year’s strong results.

Based upon management’s guidance, I have raised my 2023 EPS estimate to $10.31 (from $8.72).  I have also raised my 2024 estimate to $8.25 (from $8.01).  Along with other homebuilders, Toll’s stock has outperformed the market significantly since my last report (4/28), advancing another 20% vs. a 1.7% gain in the S&P MidCap 400.  YTD, TOL is up 48.8% vs. the MidCap 400’s 4.6% advance.  At its current price of $74.29, the stock is 12.5% above my revised price target of $66.00.  Accordingly, I am reducing my performance rating from “3” (Neutral) to “4” (Underperform).

Valuations for homebuilding stocks have recently reached all-time highs, even though mortgage rates have moved up in the past month and the economy is expected to slow (or perhaps enter a recession) later this year.  Consequently, a correction in homebuilding stock prices seems likely.

This is a copy 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.

June 16, 2023 (Report date is June 10, 2023.)

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

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