Toll Brothers

Luxury Home Builder Toll Brothers Beats Earnings Estimates; Target Price $60 in Best Case

Toll Brothers, a home construction company based in Fort Washington, reported better-than-expected earnings in the fourth quarter, largely driven by rising housing demand due to record low mortgage rates and shifting living preferences during the COVID-19 pandemic, sending its shares up about 3% on Monday.

The luxury home builder said its total sales grew 7% from a year ago to $2.55 billion in the three months ended October 31, beating market expectations of $2.08 billion. Revenue from home sales, which accounts for a majority of Toll Brothers’ total revenue, climbed nearly 9% to $2.5 billion.

For the quarter, Toll Brothers said its net income and earnings per share were $199.3 million and $1.55 per share diluted, compared to net income of $202.3 million and $1.41 per share diluted in FY 2019’s fourth quarter. Analysts expected $1.23 in per-share earnings.

The attributed the strength in demand to historically low-interest rates, an undersupply of new and resale homes and a renewed appreciation for the home as a sanctuary. The work-from-home situation during the COVID-19 pandemic is also enabling more home buyers to live where they want rather than where their jobs previously required.

Toll Brothers forecasts the fiscal year 2021 home deliveries of between 9,600 and 10,200 homes with an average price of between $790,000 and $810,000.

Toll Brothers’ shares closed 2.73% higher at $49.21 on Monday; the stock is up about 25% so far this year.

Executive Comments

“We are currently experiencing the strongest housing market I have seen in my 30 years at Toll Brothers and we continue to increase prices in nearly all of our communities as we focus on driving profitability and managing growth. The strong demand began for us in mid-May and has continued through today. In our fourth quarter, net signed contracts of 3,407 homes and $2.74 billion were the highest totals for any quarter in our history, up 68% in homes and 63% in dollars compared to one year ago. In FY 2021’s first six weeks ended December 6, demand has remained very strong compared to one year ago, with our non-binding reservation deposits, which are a precursor to contracts, up approximately 48%,” said Douglas C. Yearley, chairman and chief executive officer.

“With our highest year-end backlog in 15 years and continued strong demand, we expect to deliver the most homes in our history in FY 2021. In addition, our strong land holdings and presence in over 50 markets position us well for 10% community count growth by the end of FY 2021. Based on the pricing power that has accompanied our strong sales since May, we expect gross margin to improve over the course of the fiscal year as we deliver those homes. And as we continue to focus on more capital-efficient ways to acquire and develop the land, we expect improvement in our return on equity in FY 2021. With our well-located land holdings, luxury brand and distinctive home designs that appeal to move-up, empty-nester and affordable luxury home buyers, we are strategically positioned for continued growth in FY 2021 and beyond.”

Toll Brothers Stock Price Forecast

Ten equity analysts forecast the average price in 12 months at $49.33 with a high forecast of $60.00 and a low forecast of $40.00. The average price target represents a 0.24% increase from the last price of $49.21. From those 10 analysts, four rated “Buy”, two rated “Hold” and four rated “Sell”, according to Tipranks.

Several other analysts have also upgraded their stock outlook. Zacks Investment Research upgraded Toll Brothers to a “buy” rating from a “hold” and set a $44 target price on the stock. Citigroup boosted the target price to $38 from $34 and gave the company a “neutral” rating. TheStreet upgraded to a “b-” rating from a “c+”. At last, Wells Fargo boosted the target price to $44 from $34 and gave the company an “equal weight” rating.

Analyst Comments

“4Q20 EPS of $1.55 beat our $1.25 estimate and consensus of $1.23. The beat was driven largely by revenue on significantly greater delivery volume than we anticipated. Order growth of +68% was slightly above our estimate of +64%. Operating margin of 10.2% was a shade below our estimate of 10.4% due to land write-offs. Guidance for FY21 was generally in line with our forecast, although 1Q was light,” said Carl E. Reichard, equity analyst at BTIG.

“Despite the strong top-line beat, shares are bid down 3.5% at the time of this writing, likely due to lower than expected 1Q20 delivery and gross margin guide. The guide seems at least in part driven by strong volume already delivered in 4Q which renders backlog thinner. Expectations for a margin beat this quarter may also be playing a role,” E. Reichard added.

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