Toll Brothers’ 24Q3 EPS was $3.60, down 3.5% from 23Q3’s $3.73. My estimate was $3.18. Consensus was $3.31. Deliveries of 2,814 units increased 11.5% YOY. The average sales price per unit fell 8.6% to $968,200. Adjusted gross margin of 28.8% was 50 bp below 23Q3. The home SG&A expense ratio rose 40 bp to 9.0%. New contracts increased 10.9% YOY to 2,490 units, 2.5% below my estimate. Ending backlog was down 7.2% in units and 10.3% in dollar value. Based upon 24Q3 results and management’s guidance, I now project fiscal 2024 EPS of $14.62, 18.3% above fiscal 2023’s EPS of $12.36.
Although momentum slowed in the quarter, Toll’s operating and financial performance remains surprisingly strong in the face of high mortgage rates. Those rates have fallen recently from around 7.0% to 6.35%, raising hopes that more buyers will return to the market at the margin, particularly at the lower price points. However, homebuilder sentiment about current and future sales, as measured by the NAHB/Wells Fargo Housing Market declined to 39 in August, the fifth consecutive monthly decline and the lowest since January 2023. Sentiment about current sales and buyer traffic has declined steadily, but the sales outlook six months out has held steady.
Nevertheless, management was pleased with the 24Q3 results, including the continued growth in signed net contracts. It said that sales were slow early in the quarter, but have picked up since. Accordingly, it remains optimistic that demand for new homes will remain solid through the end of fiscal 2024 and into 2025. Management said that its strategy of widening geographies and price points to include more affordable homes, while increasing its supply of spec homes, has helped the company to avoid a drop in sales and become a more efficient builder. Consequently, it believes that it has a better opportunity to grow its core homebuilding business going forward. Still, the company’s ability to continue to grow most likely requires that the U.S. economy avoids a significant slowdown.
Since my last report on July 15, TOL’s stock has advanced 12.4%, in line with its homebuilding peers and outperforming the S&P MidCap 400’s 3.3% decline. Since reaching a new all-time high of $149.77 on August 28, the stock has fallen 7.3%, slightly worse the peers, and underperforming the MidCap 400. Volatility in homebuilding stocks, including TOL, has exceeded the recently elevated volatility in the broader market. My coverage of Toll Brothers and its stock continues without a performance rating or price target.
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.
September 15, 2024 (Report published on September 9, 2024.)
Stephen P. Percoco
Lark Research
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