Toll Brothers highlights continued strong fundamentals for homebuilders

Toll Brothers (TOL) reported a strong fiscal third quarter, beating analyst expectations on both earnings per share (EPS) and revenue. The company posted an EPS of $3.60, significantly higher than the consensus estimate of $3.31, though down slightly from $3.73 in the same quarter last year. Revenue for the quarter was $2.72 billion, up 2% year-over-year and slightly above the estimated $2.71 billion. This performance reflects Toll Brothers' ability to navigate challenging market conditions, leveraging its strong brand and operational efficiencies.

Key metrics from the quarter also showed positive momentum. The company delivered 2,814 homes, an 11% increase year-over-year, with an average selling price of $968,000. The adjusted home sales gross margin came in at 28.8%, exceeding both the company's guidance and analyst estimates, despite being slightly lower than the 29.3% recorded in the prior year. This margin improvement was attributed to a favorable mix of higher-margin homes and operational efficiencies that Toll Brothers has implemented.

However, orders for the quarter came in below expectations, increasing by only 11% year-over-year compared to the consensus estimate of 27%. Management noted that while orders were softer in the quarter, there has been a noticeable pickup in July and August, driven by lower mortgage rates. This recovery in demand, coupled with favorable economic demographics, is expected to support strong performance in the coming quarters.

Looking ahead, Toll Brothers provided an upbeat outlook for the fourth quarter and full fiscal year 2024. The company raised its full-year EPS guidance to a range of $14.50 to $14.75, up from the previous forecast of around $14, and above the analyst consensus of $14.17. For the fourth quarter, the company guided EPS between $4.10 and $4.35, ahead of the consensus estimate of $4.06. The company also expects to deliver 10,650 to 10,750 homes for the full year, with an adjusted home sales gross margin of 28.3%, up from the prior guidance of 28%.

The company’s management expressed optimism about the continued demand for luxury homes, driven by favorable demographics, particularly the growing number of millennials entering the housing market, and a persistent imbalance in housing supply and demand. This optimism is reflected in Toll Brothers' decision to increase its planned share repurchases for the fiscal year from $500 million to $600 million, signaling confidence in its long-term growth prospects.

Despite the positive results and guidance, Toll Brothers' stock movement has been relatively muted. After a strong run earlier in the year, the stock had fallen more than 7% below its recent highs, triggering an automatic sell rule. However, shares have since rebounded from support at the 50-day moving average, placing the stock back into a buy zone. The market's reaction suggests that while the company’s fundamentals remain strong, investors may be cautious given the broader economic uncertainties.

In conclusion, Toll Brothers delivered a solid Q3 performance, with strong margins, improved guidance, and a positive outlook for the rest of the year. While orders were softer than expected, the company’s ability to capitalize on favorable market conditions and its strategic operational improvements positions it well for continued success. The increased guidance and share repurchase plan further underscore management's confidence in the company's future.