On Jun 20, 2014, we issued an updated research report on
Toll Brothers Inc.
On May 28, this leading luxury home building company reported
second quarter fiscal 2014 results. Earnings surpassed the Zacks
Consensus Estimate by 24% and the prior year quarter earnings of 7
cents on the back of strong revenues and margins.
Reported revenues also beat the Zacks Consensus Estimate by 3.1%.
In addition, revenues grew 67.0% year over year as aggressive
pricing made up for flat orders. The average price of homes
delivered rose 22.4% year over year in the quarter. The number of
net orders signed in the second quarter of fiscal 2014 was flat
year over year due to leveling of housing demand in the quarter.
Housing demand has been flat for some time, which has been slowing
down its order trends. However, management believes that there is
pent up demand in the market, which will unleash as the housing
market further recovers in the near future.
Toll Brothers mostly caters to luxury move up buyers, who already
posses a residence and are looking for a shift to larger and better
homes. These homebuyers are less sensitive to price changes. Toll
Brothers thus enjoys greater pricing power than other homebuilding
The company is gaining from its aggressive investment in
well-positioned land, strong liquidity position and greater pricing
power in the luxury housing market. Moreover, its acquisition of
the homebuilding business of Shapell Industries has strengthened
its presence in the upscale Californian housing market.
However, rising interest rates, rising land, labor and material
cost act as headwinds for the company. Shortage of lots and skilled
labor and rising cost of materials have been making things
difficult for builders for quite some time now. Additionally, the
spike in mortgage rates and rising home prices are also hurting
demand. As a result, many companies witnessed declining order
trends in the last few quarters. One such homebuilding company is
), which reported soft order trends in the last reported quarter.
Toll Brothers Inc. carries a Zacks Rank #3 (Hold).
Key Picks from the Sector
Investors interested in the homebuilding sector can consider stocks
TRI Pointe Homes, Inc.
). Both the companies hold a Zacks Rank #2 (Buy).
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