Toll Brothers - Strong Inventory Position And Improved Operational Profits Make Shares More Appealing

| About: Toll Brothers (TOL)

Shares of Toll Brothers (TOL) lost over 3% of their value over the past trading week. The construction company of luxury homes reported its fourth quarter results on Tuesday. Investors were not enthusiastic given that Toll Brothers made some cautious comments for the first quarter of its fiscal 2013.

Fourth Quarter Results

Toll Brothers reported fourth quarter revenues for its fiscal 2012 of $632.8 million, up 47.9% on the year before. Revenue growth was driven by a 44% increase in the number of units sold to 1,088. Revenues came in much stronger than analysts consensus of $566.7 million.

Income from operations came in at $52.6 million, compared to a loss of $3.2 million last year. Pre-tax income came in at $60.7 million, compared to $15.3 million in the fourth quarter last year.

Toll Brothers reported a net income of $411.4 million on the back of a $350.7 million income tax benefit. Earnings totaled $2.35 per diluted share. Toll Brothers reversed a $400 million deferred tax valuation reserve, partially offset by a $49.3 million tax provision.

Earnings excluding the tax item came in at $0.30 per diluted share, up from earnings of $0.09 in the fourth quarter last year. On average, analysts expected the company to earn $0.24 per share.

CEO Douglas C. Yearley commented on the results, "Pent-up demand, rising home prices, lower interest rates, and improving consumer confidence motivated buyers to return to the housing market in FY 2012. As household formations accelerated and unsold home inventories dropped to record lows, the industry took further steps toward a sustained housing recovery."


The prospects for Toll Brothers look very promising. The company signed contracts on 1,098 units for a contract value of $684.1 million. The contracts results in a book-to-bill ratio of 1.08.

Consequently, the backlog for Toll Brothers rose to $1.67 billion which is up 70% compared to last year. The backlog includes 2,569 units to be build in the coming periods.

For the fiscal year of its 2013, Toll Brothers expects to deliver 3,600 to 4,400 homes for an average price of $595,000 to $630,000. As such, revenues could come in between $2.14 billion and $2.77 billion.

At the end of the fourth quarter, Toll Brothers had 40,400 construction lots owned and optioned, giving it enough construction lots inventory for 10 year's of home construction at current sales levels.


Toll Brothers ended its fourth quarter with $1.27 billion in cash, restricted cash and equivalents. The company operates with $2.25 billion in short and long term debt, for a net debt position around $1 billion.

Toll Brothers generated full year revenues of $1.88 billion. The company net earned $487.1 million, or $136.4 million excluding this quarter's one-time tax benefit.

The market currently values Toll Brothers at roughly $5.2 billion. This values the firm at roughly 2.8 times annual revenues and roughly 38 times normalized annual earnings.

Toll Brothers does not pay a dividend at the moment.

Some Historical Perspective

Year to date, shares of Toll Brothers have risen some 51% on the back of signs of a sustained housing recovery in the US. Shares rose from levels around $21 in January to highs of $36 in September. Shares have fallen back some 15% from that point in time to current levels of $31 per share.

Investment Thesis

Despite the fact that revenues and earnings comfortably beat analysts consensus, investors and analysts are a little disappointed with the prospects for the start of 2013. The value of signed contracts rose just by 33% in the first five weeks of the year, a much slower pace than the fourth quarter of 2012. Toll Brothers sees much slower traffic growth, possibly due to the fiscal cliff discussions.

CEO Yearley Jr commented in the conference call, "We are disappointed in traffic. I think part of it is that the market is still in the early stages of recovery and we are very encouraged that, as traffic picks up, there's a great opportunity to increase absorption to have some real pricing power."

The company is seeing very high converging rates from visitors into buyers, but general traffic levels are very disappointing.

Toll Brothers remains confident about the long term prospects of the firm. The firm has a strong competitive position based on its financial strength. Furthermore the great inventory of construction lots gives the firm a clear competitive advantage. According to the company, the construction industry needs to produce between 1.4 and 1.7 million homes per year to keep up with demographic driven demand, far higher than current production levels around 750,000.

In August I took a look at Toll's prospects. At the time, I remained on the sidelines. The outlook for the company remains good, given that normalized earnings came in around $60 million during the fourth quarter, valuing the firm at 22 times annual earnings.

Pricing power and higher production levels will result in a more appealing valuation next year and into the future. I am a buyer on significant dips.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.