Toll Brothers (TOL) Gains On Less Competition, Costs Rise

Toll Brothers Inc. (NYSE:TOL) has been exhibiting robust performance on less competition in the luxury new home market as well as solid housing demand.

Though Toll Brothers’ shares have underperformed the Zacks Homebuilding Industry so far this year, it has outperformed the industry in each of the 4-week, 12-week and 52-week time frames.

Meanwhile, estimates for the current quarter and year have moved up 6.3% and 0.3% over the last 60 days, suggesting analyst optimism on the stock’s performance.

Toll Brothers missed analysts’ expectations on both earnings and revenues in the recently reported fourth-quarter fiscal 2017. However, earnings increased 72.6%, while revenues were up 9% year over year, given the higher number of homes delivered.

Deliveries increased 9% in units, while contracts surged 20% in dollars and 15% in units on a year-over-year basis. The fourth quarter marked the 13th consecutive quarter of year-over-year growth in contract dollars and units. However, average price of homes delivered remained almost flat year over year during the quarter.

Positives

Less competition in the luxury new home market proves beneficial for Toll Brothers. The company mostly caters to luxury move up buyers, who already possess a residence and are looking to shift to larger homes. These homebuyers are less sensitive to price changes. Thus, Toll Brothers enjoys an edge over other homebuilding companies, resulting in increased home deliveries, earnings and revenue backlog growth. In 2017, total revenues increased 12% year over year to $5.82 billion. Deliveries totaled 7,151 units, up 17%. Earnings came in at $3.17 per share, up 45.4% year over year.

Moreover, given the pent-up housing demand, Toll Brothers has secured some of the most sought-after urban locations in the country, where land is scarce and approvals are not easy to obtain. In November 2016, Toll Brothers acquired Coleman Homes in Boise, ID, that involved the takeover of approximately 1,400 owned lots, 350 controlled lots and the immediate addition of 15 selling communities to its community count. Through this acquisition, Toll Brothers expanded its footprint, mainly in Western United States.

Also, the outlook for the U.S. homebuilding industry is quite compelling, given the affordable interest rates and tight inventory indicating pent-up demand. Moreover, the latest positive housing data reassures the industry’s strength, courtesy of solid economic growth amid supply shortages and recovery from hurricanes in Florida and Texas. Consistent job growth along with seemingly high homebuilders’ confidence is driving momentum.

Concerns

A shortage of buildable lots and skilled labor, escalating land prices and higher material costs are exerting pressure on margins of Toll Brothers as well as other homebuilders. In fact, Toll Brothers’ adjusted gross margin declined 80 basis points (bps) in fiscal 2017.

Additionally, the company believes that home sale prices will decline and have an adverse year-over-year impact on adjusted gross margin, which adds to the woes.

Zacks Rank & Stocks to Consider

Toll Brothers carries a Zacks Rank #3 (Hold).

A few better-ranked stocks in the sector are Patrick Industries, Inc. (NASDAQ:PATK) , United Rentals, Inc. (NYSE:URI) and Armstrong World Industries Inc (NYSE:AWI) .

United Rentals sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

United Rentals is expected to see a 22.1% rise in 2017 earnings.

Patrick Industries carries a Zacks Rank #2 (Buy) and is expected see 24.5% growth in earnings in 2017.

Armstrong World Industries also carries a Zacks Rank #2. The company’s earnings are expected to improve 21.8% in 2017.

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