Toll Brothers Earnings Preview

| About: Toll Brothers (TOL)

Toll Brothers Inc. (NYSE:TOL) announced that it expects to release its fourth quarter and fiscal 2011 results, before the market opens on December 06, 2011. Horsham, Pennsylvania-based Toll Brothers realized adjusted net income of 2 cents per share in the third quarter of 2011, missing the Zacks Consensus Estimate by a penny. For the upcoming quarter, the Zacks Consensus Estimate for the company is pegged at 5 cents per share, reflecting an annualized growth of 186%.

On the other hand, the Zacks Consensus Estimate for fiscal 2011 is projected at 20 cents per share, reflecting an annualized growth of 68%. The downside potential of the quarterly estimate, essentially a proxy for future earnings surprises, is 20% while the upside potential for the annual estimate is 11.77%.

With respect to earnings surprises, the company missed the Zacks Consensus Estimate in three of the trailing four quarters. This is reflected in the average earnings surprise of negative 13.33%.

Third Quarter Recap

Revenues declined 13% year over year to $394.3 million, driven by a 14% decrease in home deliveries to 693 units. The demand for luxury homes fell in the quarter owing to poor industry conditions and subdued confidence among luxury homebuyers. At quarter end, the company’s total selling communities amounted to 207 versus 190 selling communities at the end of the prior-year quarter.

The company signed gross contracts worth $439.2 million in the quarter compared with contracts worth $422.5 million in the prior year. The average price per unit of gross contracts signed was approximately $570,000 compared with $566,000 last year. Total value of net contracts signed amounted to $406.7 million at an average price of $570,000 versus $400.1 million of net contracts at an average price of $571,000 in the previous year.

The company’s total backlog at the end of the quarter totaled 1,780 homes (valued at $1.02 billion) compared with 1,636 units (valued at $939.4 million) a year ago. Cancellation rate increased to 7.4% in the quarter from 6.2% in the year-ago quarter.

Toll Brothers ended the quarter with considerably low cash balance. The company had cash and cash equivalents of $890.1 million as of July 31, 2011 compared with $1.04 billion as of October 31, 2010. Inventories stood at $3.42 billion at July 31, 2011 compared with $3.24 billion as of October 31, 2010.

Estimate Revisions Trend

Earnings estimates for the fourth quarter and fiscal 2011 are currently pegged at a profit of 5 cents and 20 cents per share, respectively. The ongoing weakness in the homebuilding and 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 15 analysts covering the stock for the fourth quarter, only three analysts raised their estimates in the past 30 days whereas none downgraded the same.

Again, for fiscal 2011, out of the 14 analysts covering the stock, only one analyst revised the estimate upward in the past 30 days while none moved in the opposite direction.

Magnitude of Estimate Revisions

Following the third quarter earnings release in August, fourth quarter earnings per share were projected at a profit of 5 cents and has remain unchanged since then. .

For the full year, the current estimate rose 2 cents to 20 cents over the past 60 days and has remained at that level since then.

Our Take

Toll Brothers primarily engages in the development, construction, financing, and sale of residential homes in the United States. It builds luxury, single-family detached and attached home communities; master planned luxury residential resort-style golf communities; and urban low, mid, and high-rise communities principally on the land it develops and improves.

A depressed housing industry is the biggest concern for any homebuilder including KB Home. Besides, there is no sign of a speedy recovery. Home sales declined consistently in each of the first three months of the year. 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 coupled with tough competition from pre-owned homes.

Toll Brothers’ competitors include DR Horton Inc. (NYSE:DHI), PulteGroup Inc. (NYSE:PHM), Lennar Corp. (NYSE:LEN), KB Home (NYSE:KBH) and Hovnanian Enterprises Inc. (NYSE:HOV).

Keeping these in mind, the shares of Toll Brothers are maintaining a Zacks #3 Rank, which translates into a short-term “Hold” rating.

TOL free stock analysis report

DHI free stock analysis report

PHM free stock analysis report