Toll Brothers’ 24Q2 EPS was $4.55, up 60% from 23Q2’s $2.85. Excluding a $1.17 profit from a land sale, 24Q2 EPS was $3.38. My estimate was $3.06. Deliveries of 2,641 units increased 6% YOY. The average sales price per unit rose 0.3% to $1.0 million. Adjusted gross margin of 28.2% was 10 bp below 23Q2. The SG&A expense ratio fell 10 bp to 9.0%. New contracts jumped 30% YOY to 3,041 units, far exceeding my estimate. Ending backlog was down 6.4% in units and 18.8% in dollar value. Based upon 24Q2 results and management’s guidance, I now project fiscal 2024 EPS of $13.93, up from 2023’s $12.36.
Toll’s performance has been surprisingly strong in the face of persistently high mortgage rates, which seem to be stuck around 7%. The company entered the year with a unit backlog that was down 19%. Yet, its full year guidance (with half the year now on the books) indicates that unit closings will be up 10.5%. That implies its cycle time (to deliver a unit out of backlog) has declined from 10 months to 7.5 months. Toll has reduced cycle times mostly by increasing the speculative units that it carries at all stages of construction: i.e. poured foundations, framed and completed houses. This has made more inventory available for quick sales, but at the added cost (and risk) of carrying more on its balance sheet. Besides adding specs, the company has broadened its product portfolio by expanding its offerings of affordable luxury homes.
Sales of homes for Toll and many other publicly traded homebuilders have held up far better than the rest of the market, both existing and new. The builders attribute this outperformance to their ability to adapt quickly, which has helped them to gain market share. Even though there is evidence that a substantial number of sales have been pulled forward since the onset of the pandemic, the builders believe that an easing of mortgage rates later this year will bring out more buyers. So Toll (and others) are pursuing plans to expand their active selling community counts, apparently on the belief that they can continue to overcome the dynamics of the business cycle for the foreseeable future.
Since my last report on December 7, 2023, TOL’s stock has surged 39%, outperforming the S&P MidCap 400’s 16.6% gain and the Dow Jones U.S. Homebuilding Index’s 22% gain and achieving a new all-time high. Its outperformance vs. the broader market occurred mostly until May 15. Since then, TOL (along with the rest of the homebuilders) has been struggling to hold on to its gains. The stock gapped up on last week’s favorable CPI report, but those gains do not appear to be sustainable at this time. At this point, I am continuing coverage of Toll Brothers and its stock without a performance rating.
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.
July 18, 2024 (Report published on July 16, 2024.)
Stephen P. Percoco
Lark Research
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