Toll Brothers, Inc. (TOL) reported adjusted earnings of 35 cents per share in the second quarter of fiscal 2014, surpassing the Zacks Consensus Estimate of 25 cents by 40%. Adjusted earnings increased significantly from 14 cents in the prior-year quarter on the back of strong revenues and margins.
The company reported revenues of $860.4 million in the second quarter of fiscal 2014, up 67.0% year over year as aggressive pricing made up for flat orders. Reported revenues also beat the Zacks Consensus Estimate of $834 million by 3.1%.
Homebuilding Revenues and Orders
The number of homebuilding deliveries increased to 1,218 units in the second quarter of fiscal 2014, up 36% year over year, attributable to a rise in demand and low competition for luxury homes. The average price of homes delivered was $706,000 in the quarter, up 22.4% year over year. The company ended the quarter with 252 selling communities, up 12.0% from the prior year quarter.
The number of net orders signed was 1,749 units in the second quarter of fiscal 2014, flat year over year. Value of net orders signed during the quarter was $1.27 billion, up 7% year over year.
Toll Brothers closed $1.6 billion Shapell Homes acquisition on Feb 4, 2014. Toll Brothers acquired 126 units from this transaction, which were not included in the number of net orders signed for the second quarter 2014.
The company has been witnessing weakness in orders for some time as the demand for luxury homes has slowed down due to harsh weather. Also the company faces difficult year-over-year comparison. Another homebuilding company NVR, Inc. (NVR), also witnessed weak order growth in the first quarter of 2014.
The company’s backlog totaled 4,324 homes as of Apr 30, 2014, up 18% year over year. Potential housing revenues from backlog grew 27% year over year to $3.21 billion, primarily attributable to an increase in prices of backlogs.
Margin Discussion
The company’s homebuilding gross margin (excluding interest and write-downs) grew 30 basis points (bps) to 23.6%, driven by improved pricing. However, margins declined 80 bps sequentially.
As a percentage of revenues, selling, general and administrative (SG&A) expenses improved 390 bps to 11.5% due to better leverage. Operating margin improved 470 bps year over year to 7.9% on the back of improved homebuilding gross margin and SG&A ratio.
Fiscal 2014 Outlook
Toll Brothers maintained its guidance and expects to deliver 5,100 to 5,850 homes in fiscal 2014. The average price is expected to range between $690,000 and $720,000 per home compared with the prior expectation of $675,000 and $720,000 per home. The company expects fiscal 2014 gross margin to improve 175 to 200 bps over 2013 levels. The company continues to expect community count to remain between 250 and 290 in fiscal 2014. The backlog conversion rate is expected to be at 31%.
Toll Brothers carries a Zacks Rank #2 (Buy).
Investors interested in the homebuilding sector can also consider Gafisa S.A. (GFA), and TRI Pointe Homes, Inc. (TPH). Both the companies carry a Zacks Rank #2.
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