Why Is Toll Brothers (TOL) Down 42.6% Since Last Earnings Report?

A month has gone by since the last earnings report for Toll Brothers (TOL). Shares have lost about 42.6% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Toll Brothers due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Toll Brothers (TOL) Q1 Earnings Lag, Margin Woes to Stay

Toll Brothers, Inc.'s first-quarter fiscal 2020 earnings and revenues lagged the respective Zacks Consensus Estimate, as lower average selling prices weighed on margins. It expects a challenging sales environment to further affect adjusted gross margin in the first half of fiscal 2020.

Earnings & Revenue Discussion

The country's leading luxury homebuilder reported earnings of 41 cents per share in the quarter under review, missing the consensus mark of 45 cents by 8.9%. Moreover, the said figure dropped 46.1% from the year-ago figure of 76 cents as a result of lower revenues and margins.

Consolidated revenues of $1.33 billion lagged the consensus mark of $1.42 billion by 6.6%. The reported figure also decreased 2.3% year over year due to lower average selling prices.

Segment Detail

Toll Brothers operates under two reportable segments, namely Traditional Home Building and Urban Infill ("City Living").

Revenues from Traditional Home Building totaled $1.26 billion, down 0.4% year over year, and that of City Living decreased 42% to $39.8 million during the quarter.

Inside the Headline Numbers

Homebuilding deliveries during the quarter grew 5.3% year over year to 1,611 units. Deliveries decreased in all the regions served by the company, except Pacific. Deliveries in Citi Living declined to 36 units from 64 units a year ago.

The average price of homes delivered was $805,300 in the quarter, down 6.6% from the year-ago level of $862,300.

Nonetheless, the number of net signed contracts or orders during the reported quarter was 1,806 units, up 31% year over year. The value of net signed contracts was $1.49 billion, reflecting a 28% increase from the year-ago quarter.

At the end of fiscal first quarter, Toll Brothers had a backlog of 6,461 homes, representing a 8.5% year-over-year increase. Potential revenues from backlog improved 1.6% year over year to $5.45 billion owing to a 8.5% rise in the number of homes in backlog.

Cancellation rate during the reported quarter was 9.4%, reflecting a decline from 9.6% in the prior-year period.

Margins

The company's adjusted home sales gross margin was 20.9%, contracting 330 bps in the quarter.

SG&A expenses — as a percentage of home sales revenues — were 14.8%, up 250 bps from the year-ago quarter. Operating margin of 3.6% was down 550 bps in the quarter.

Financials

Toll Brothers had $519.8 million cash and cash equivalents as of Jan 31, 2019 compared with $1.29 billion at fiscal 2019-end.

During the fiscal first quarter, the company repurchased 11.7 million shares for a total purchase price of $476 million.

Second-Quarter Fiscal 2020 Guidance

For the quarter, home deliveries are anticipated in the range of 1,850-2,050 units at an average price of $800,000-$820,000 (suggesting a decrease from the year-ago figure of $895,900). Home deliveries in the year-ago period were 1,911 units.

Toll Brothers expects adjusted home sales gross margin of 20.5%, implying a decline from 23.5% recorded in the year-ago period. SG&A expenses, as a percentage of home sales revenues, are projected at 12.4% (indicating an increase from 10.4% in the year-ago period).

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates review. The consensus estimate has shifted -36.71% due to these changes.

VGM Scores

At this time, Toll Brothers has a poor Growth Score of F, a grade with the same score on the momentum front. However, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Toll Brothers has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.