Sometimes it pays to miss estimates. A disappointing quarter can cause analysts to lower earnings forecasts, making it easier to beat the next time around.
That's the case with Toll Brothers (NYSE:TOL), the luxury homebuilder. Last quarter, Toll earned 3 cents, way below consensus 10 cents. Disappointed, the analysts drastically lowered estimates for this quarter. Notice the extreme decline in forecast versus other homebuilders:
By the drastic drop in forecast, you'd think Toll had a terrible last quarter. It didn't. Revenue increased 32%. Income before taxes rose from -6.4 million to 8.3 million. Backlog increased 66%. The quarter was nothing to cry about - expectations were just impossibly high.
Now that expectations have come down, Toll can more easily deliver an earnings beat. My prediction: Toll will clobber estimates, just as it handily beat them in the April, July, and October 2012 quarters. Low analyst expectations have given investors an excellent entry point to buy Toll Brothers before its May earnings "surprise."
Disclosure: I am long TOL. 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.
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