The Golden Age For Toll Brothers Is Just Beginning
Toll Brothers (NYSE: TOL) and the rest of the homebuilding industry are in the midst of a golden age. Don't let the new home sales data fool you. While the pace of new home sales has fallen over the past year, that is a function of the supply-demand imbalance that is also supporting business within the industry. Demand is high and inventory is low resulting in fewer sales but the salient factor is that demand is high and the builders are working to expand capacity. What this means for the homebuilders is a steady supply of business and the opportunity to reap the benefits of scale.
A Profitable Quarter For Toll Brothers
Everything about Toll Brothers’ 3rd quarter report reveals increasing earnings leverage within the company's business. Not only is earnings growth outpacing revenue growth but internal metrics point to wider margins next year as well. The $2.26 in net consolidated revenue is up 37% from last year and beat the consensus by 90 basis points. This year's gains are against a soft comp in last year's second quarter so the two-year comparison is important as well. Sales are up 27.6% over the past two years and are expected to accelerate again in the next quarter. In terms of homes delivered, the number of homes delivered increase by 28% to 2597 and was aided by an increase in average sale price.
Moving down to the earnings, the company's adjusted gross margin came in at 25.6% versus 23.9% last year. At the operating level, the operating margin came in at 12.3% versus 9.1% last year and drove a solid return on the bottom line. On the bottom line, the GAAP earnings of $1.87 beat the consensus by $0.33 and are up more than double from last year.
The internal metrics point to continued earnings strength and support the company's decision to raise guidance. The company says net signed contracts increase by 35% year-over-year to drive a 55% increase in the backlog. As for guidance, the company has reduced its outlook for the number of homes delivered in the fourth quarter while Increasing its expectation for realized prices. Deliveries should top 3,450 or up 32% from the 3rd quarter.
“Demand continues to be very strong … The housing market is being driven by many strong fundamentals, including low mortgage rates, favorable millennial-driven demographics, a decade of pent-up demand, low new home supply, and a tight resale market. We expect strong and sustainable demand for our homes in the years to come,” says Douglas C. Yearley, Jr., chairman and chief executive officer.
A Dividend Increase Is In Store For Toll Brothers Shareholders
Toll Brothers isn't a high-yielding dividend payer but it's one with a high expectation for dividend increases. That current payout yields a little bit more than 1% but with an 11% payout ratio, better than expected earnings, and widening margins we see a path to future increase. The company increased the distribution 2 quarters ago by nearly 50% and we think another substantially large increase could be on the way. The balance sheet is in great shape as well, so no worry there to cloud the outlook.
The Technical Outlook: Toll Brothers’ Moves Up Off The Bottom
Shares of Toll Brothers corrected over the summer but have put in a bottom and are now moving higher. PriceTargets.com analyst’s data shows little activity since the last earnings reports but we expect to see a round of price target increases begin very soon. Today's action has the price moving above the baseline of a head and shoulders reversal pattern and confirming the longer-term bullish uptrend. In our view, the stock will be retesting the all-time highs within a few weeks if not days. Once that resistance is broken down, we expect to see price action move up into the $80 to $90 range.
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