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Toll Brothers Inc. (NYSE:TOL) is scheduled to release its third quarter 2011 results before the market opens on August 24, 2011. Horsham, Pennsylvania-based Toll Brothers incurred a net loss of 19 cents per share in the previous quarter, much wider than the Zacks Consensus Estimate of a loss of 5 cents per share.

For the upcoming quarter, the Zacks Consensus Estimate for Toll Brothers is pegged at a profit of 3 cents per share, which reflects an annualized decline of 80%. The downside potential of the estimate, essentially a proxy for future earnings surprises, is 33.33%.

With respect to earnings surprises, the company outdid the Zacks Consensus Estimate in the trailing four quarters. The average earnings surprise is 46.67%, with negative surprises being witnessed in two of the four concerned quarters.

Second Quarter Recap

Revenues in the quarter rose 3% year over year to $319.7 million, driven by a 3% increase in deliveries. However, revenues missed the Zacks Consensus Estimate of $322 million. Home deliveries in the quarter totaled 591 units, up 9% from 543 units reported in the prior-year quarter. The demand for luxury homes improved in the quarter on the back of renewed confidence among luxury homebuyers.

The company signed gross contracts worth $521.1 million in the quarter compared with $489.4 million in the year-ago quarter. The average price per unit of gross contracts signed was approximately $570,000 compared with $565,000 in the prior-year period. Total value of net contracts signed amounted to $500.9 million, with an average price of $570,000 versus $464.6 million of net contracts with an average price of $570,000 in the year-ago quarter.

The company’s total backlog at the end of the quarter totaled 1,760 homes (valued at $1.01 billion) compared with 1,738 units (valued at $993.5 million) a year ago. Cancellation rate dropped to 3.9% this year from 5.3% last year. Total selling communities were 203 versus 190 in the prior year.

The company expects to deliver 2,300–2,800 homes in fiscal 2011 at an average price of $540,000 to $560,000. Total selling communities is projected between 215 and 225.

Estimate Revisions Trend

Earnings estimate for the third quarter of fiscal 2011 is currently pegged at a profit of 3 cents per share. The ongoing weakness in the construction industry induced the analysts to adopt a cautious stance on the company’s performances in the upcoming quarters.

Agreement of Estimate Revisions

Out of the 13 analysts covering the stock for the third quarter of fiscal 2011, one analyst downgraded the stock in the past 7 days. However, none upgraded the stock in the last 30 days.

Magnitude of Estimate Revisions

Following the second quarter earnings release in May, third quarter earnings per share were projected at a profit of 5 cents. However, over the last 60 days, the estimate fell to a profit of 3 cents per share. Since then, the estimate is maintained at 3 cents per share.

Our Take

A depressed housing industry is the biggest concern for any homebuilder including Toll Brothers. Besides, there is no sign of a speedy recovery. Home sales declined consistently in each of the recent months. The situation is feared to deteriorate further.

In addition, house prices also plunged continuously, driven by an excess supply of homes in the face of depressed demand and tough competition from resale homes, foreclosed homes, short sale homes and rental housing.

Another growing concern is the intensifying competition from big national homebuilders including DR Horton Inc. (NYSE:DHI), PulteGroup, Inc. (NYSE:PHM) and Hovnanian Enterprises Inc. (NYSE:HOV).

Thus, keeping these in mind, the shares of Toll Brothers are maintaining a Zacks #4 Rank, which translates into a short-term Sell rating.

Source: Toll Brothers: Earnings Preview