Bolstered by a lower-than-expected tax rate, Toll Brothers beat fiscal year second quarter earnings projections today. The builder’s gross margins, excluding interest and write-downs, was 25.3%, while order growth was 10% above last year and absorption came in 3% higher. But its revenues fell 1%, pushing builder stocks down in early trading today.
Toll’s order growth was driven by gains in the North, Mid-Atlantic and West, which rose 25%, 13% and 12%, respectively. Toll’s South region and City Living condo brand fell 5% and 4%. On a positive note, its cancellation rate fell to 3.1% from 5.6% last quarter and 3.7% last year.
So far, in its fiscal year third quarter, Toll noted that orders were lackluster in the first week. But in the following three weeks, orders and deposits rose 29% and 33%, respectively.
Toll also provided visibility for the remainder of the year, increasing its average sales price range from $730,000 to $760,000, up from $725,000 to $760,000, and expecting its gross margins to be consistent with 2014’s 26%.
“Management reiterated community count guidance as it expects to end fiscal year 2015 with 270 to 310 selling communities,” said UBS’s Susan Maklari in a research note. “That said, we expect the absorption pace in the second half of the year to be relatively flat versus 2014, reflecting management's continued focus on maintaining its pricing power.”
Projections for 2016 also came into focus in Toll’s earnings report. “Toll now expects gross margin expansion and net income growth in fiscal year 2016 versus previously being ‘optimistic’ about earnings growth,” said J.P. Morgan’s Michael Rehaut in a report.
Despite the mixed results this quarter, Maklari likes Toll going forward. “We continue to believe Toll is uniquely positioned among the public builders, given its focus on the luxury buyer; broad product diversity; and management’s efforts to expand its geographic footprint, including the acquisition of Shapell Homes, which dramatically increased its California exposure,” she said in a research note.