Toll Brothers: Can Non-GAAP Earnings Sustain Investor Confidence in a Slowing Housing Market?

In the third quarter of 2024, Toll Brothers (TOL) delivered a performance that defied the broader housing market's struggles. While U.S. home sales stagnated and affordability crises deepened, the luxury homebuilder reported a 2% year-over-year revenue increase to $2.72 billion, driven by a 11% surge in home deliveries. This outperformance raises a critical question: Can Toll Brothers' strong Non-GAAP earnings and disciplined cost management offset persistent demand headwinds in a market marked by high mortgage rates and inventory shortages?

The Numbers Behind the Resilience

Toll Brothers' Q3 results were anchored by its ability to maintain pricing power and operational efficiency. The company's adjusted home sales gross margin expanded to 28.8%, outpacing its prior-year guidance of 27.8%, while SG&A expenses as a percentage of revenue fell to 9.0% from 8.6% in Q3 2023. These metrics highlight the company's strategic focus on high-margin luxury homes, where demand remains relatively insulated from macroeconomic pressures.

Net signed contracts also grew 11% year-over-year to $2.41 billion, with 2,490 homes sold. This reflects Toll Brothers' ability to attract high-income buyers, a demographic less sensitive to interest rate fluctuations. However, the backlog declined 10% to $7.07 billion, signaling a moderation in order growth. While the cancellation rate dropped to 6.4% (from 9.8% in 2023), this metric alone cannot mask the broader industry trend of declining buyer activity.

Market Context: A Sector in Transition

The U.S. housing market in Q3 2024 was defined by duality. New home sales rose to 738,000 in September—the highest in 17 months—while existing home sales hit a 14-year low. Mortgage rates, which dipped to 2-year lows in September, rebounded to 6.81% by November, dampening buyer enthusiasm. For context, the top ten homebuilders now control 44.7% of new single-family home closings, up from 42.3% in 2023. Toll Brothers, with a 1.6% market share, remains a niche player in a consolidating industry.

The luxury segment, however, tells a different story. Public homebuilders like Toll Brothers have gained traction in this space, leveraging brand equity and access to capital. The company's national footprint—spanning 24 states and 60+ markets—positions it to capitalize on demographic tailwinds, including the wealth transfer from Baby Boomers to Millennials and the aging housing stock.

Strategic Advantages and Risks

Toll Brothers' strength lies in its balance sheet and capital allocation discipline. The company ended Q3 with $893.4 million in cash and $1.77 billion in available credit, enabling it to fund land acquisitions and repurchase $246 million of shares. Its 72,700 controlled lots provide a buffer against near-term volatility, though the average price per home in backlog ($1,044,000) suggests reliance on high-end demand.

Yet, risks persist. The broader housing shortage of 3.7 million units and rising insurance costs could pressure margins. Additionally, the top ten builders' dominance (44.7% of closings) means competition for premium lots and buyers is intensifying. Toll Brothers' ability to maintain its 28.8% adjusted gross margin will depend on its capacity to optimize land costs and avoid price concessions.

Investor Implications

For investors, Toll Brothers' Q3 performance underscores its resilience in a fragmented market. The company's guidance for $10.9 billion in 2024 home sales revenue and $14.50–$14.75 per share earnings reflects confidence in its luxury positioning. However, the 10% decline in backlog and 6.7% year-over-year drop in average delivered price ($968,000 vs. $968,200) hint at potential margin compression.

The key question is whether Toll Brothers can sustain its premium pricing in a market where affordability is deteriorating. While its Non-GAAP metrics are robust, the company's long-term success will hinge on its ability to navigate interest rate volatility and maintain its edge in the luxury segment. For now, its strong liquidity, disciplined cost structure, and strategic focus on high-income buyers justify a cautiously optimistic outlook.

Conclusion

Toll Brothers' Q3 results demonstrate that luxury homebuilders can thrive even in a weak housing market—provided they maintain pricing power and operational efficiency. However, the broader industry's challenges, including high mortgage rates and inventory imbalances, remain unresolved. Investors should monitor the company's land acquisition strategy, backlog trends, and margin stability as key indicators of its ability to outperform. In a sector where market share is consolidating, Toll Brothers' niche positioning offers both opportunity and risk. For those willing to bet on its luxury model, the company's strong balance sheet and disciplined execution provide a compelling case for long-term value creation.