Toll Brothers Sees Solid Housing Demand, Costs Escalate

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Toll Brothers Inc.TOL has been exhibiting robust performance on solid housing demand which in turn is helping the company to offset escalating building material and labor costs.

The company's third-quarter fiscal 2017 results reflected solid top and bottom-line performance with a year-over-year increase of 18% and 42.6%, respectively. Earnings and revenues also surpassed the Zacks Consensus Estimate by 27.9% and 1.5%, respectively. Additionally, Toll Brothers raised its fiscal 2017 guidance.


Given significant pent-up demand for housing and limited competition in luxury homes in the United States, Toll Brothers has managed to drive revenues on pricing strength. In fact, the third quarter of fiscal 2017 marked the 12th consecutive quarter of year-over-year growth in contract (in terms of dollars and units), with double-digit increases in each of the last four quarters. In the first nine months of fiscal 2017, total revenues of $3.79 billion rose 14% and deliveries of 4,727 units increased 22% from the prior-year period. The company's net signed contracts of $5.07 billion and 6,196 units increased 21% and 24%, respectively, in the same period. Toll Brothers also achieved double-digit growth in earnings, revenues, contracts and backlog in fiscal 2016.

Furthermore, Toll Brothers is using its strong liquidity position to secure the most sought-after urban locations in the country like New York City Market, Northern New Jersey, Washington D.C. and Philadelphia. Buoyed by a compelling U.S. homebuilding industry and solid land position, the company enjoys a competitive edge over peers who are presently facing land availability constraints.

Banking on an enhanced housing scenario and remarkable top-line growth, Toll Brothers raised its fiscal 2017 guidance in its third-quarter earnings call. Revenues for fiscal 2017 are projected in the band of $5.6 billion to $6 billion (previous guidance $5.4-$6.1 billion), compared with $5.17 billion in fiscal 2016. Moreover, home deliveries are anticipated in the range of 7,000 to 7,300 units (previously 6,950-7,450) at an average price of $800,000-$825,000.


Although the current macroeconomic conditions are favorable for home buyers owing to a historically-low mortgage rate and a solid job market scenario, 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 like KB Home KBH , PulteGroup, Inc. PHM , D.R. Horton, Inc. DHI and others.

In fact, Toll Brothers' adjusted gross margin declined 30 basis points (bps) in the third quarter of fiscal 2017. The company expects its adjusted gross margin in the range of 24.8-25% for fiscal 2017, marginally lower than the previous guidance of 24.8-25.3%.

Nonetheless, a strong brand presence, a significant number of owned lots and a pricing power over competitors are likely to boost sales.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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