Recently, one of the largest luxury homebuilders in the US, Toll Brothers (TOL), released its results for the fiscal fourth quarter (ended October 31, 2013). Revenue growth and unit delivery expansion were fantastic, up 65% in dollars and 36% in units compared to the prior-year quarter. Net signed contracts of $839 million and 1,163 units rose 23% in dollars and 6% in units compared to last year's period, while on a per-community basis, the fourth quarter witnessed net signed contracts per community (5.17) that was the highest for any fourth quarter since 2005. Backlog of $2.63 billion and 3,679 units rose 57% in dollars and 43% in units compared to the year-ago mark. The average price of homes delivered was $703,000, compared to $651,000 in the third quarter and $582,000 in last year's quarter. Gross and operating margins expanded 80 basis points and 400 basis points thanks to an improved pricing mix and better leveraging of selling, general, and administrative (SG&A) expenses.
Unit and pricing performance at Toll Brothers was fantastic during the period, but the company did note that 1) the impact of price increases, 2) uncertainty from the political discord in Washington, and 3) a sudden rise in interest rates led to a "leveling of demand." The homebuilder noted flat demand during the most recent five weeks, though the initial week of the current quarter (of fiscal 2014) suffered greatly as a result of difficult comparisons due to Hurricane Sandy. Though Toll Brothers believes the leveling of demand may be temporary, we're keeping a close eye on trends. Looking forward to 2014, management sees its "revenue and community count growing, margins improving and profitability increasing." Executive chairman Robert Toll's comments were still quite positive for the homebuilding group, as a whole:
"...We believe that Toll Brothers, as well as the other public home building companies, still have significant room for growth. The economy, while still improving slowly, is far from fully recovered. National housing starts, although projected to be up in 2013 compared to 2012, will still be well below the average of the last forty years despite an increased population…
…Due to a shortage of approved home sites, labor constraints in some markets, and a lack of available capital for small and mid-sized privately-owned builders, the supply of luxury homes is still not meeting current demand, let alone the pent-up demand of the last seven years. This supply constraint could lead to a further escalation in luxury home prices above and beyond normal trends until industry production returns to historic equilibrium…
…Supported by our solid land portfolio, community count growth, strong financial position, broad product diversification, industry-leading brand, and dedicated team, we believe that FY 2014 will be another year of growth for Toll Brothers."
Toll Brothers' quarterly performance was solid, and while we plan to keep a close eye on demand trends, we're not reading too much into the 'leveling of demand' comments by the firm. Housing prices continue to be on the rise, and backlogs are still very healthy across the homebuilding space. We like the fundamental improvements in housing that we recognized as early as January 2012, and we've largely reaped the rewards of the economic healing that it has caused. We won't be putting new money to work in the homebuilding industry, as valuations aren't extremely compelling across the group. For ancillary exposure to a strengthening housing market, we continue to like Whirlpool (WHR) as an indirect idea. Our best ideas continue to reside in our Best Ideas portfolio and Dividend Growth portfolio, however.