Toll Brothers (TOL) Delivers Solid AprQ Results As Its Wealthy Clientele Shrugs Off Higher Inflation
3:06 pm Wednesday, May 25th, 2022
Toll Brothers (TOL) blew the roof off Q2 (Apr) earnings, posting beats on its top and bottom lines. The luxury home builder also refreshed its share repurchase authorization by 20 mln shares, or around $900 mln using current prices, and other qualitative remarks are contributing further to today’s solid price action. For instance, the company is confident that many of the fundamental drivers that supported the housing market over the past few years remain firmly in place, including favorable demographics, a supply/demand imbalance, and an overall greater appreciation for new homes. Also, TOL’s cancellation rates hovered around just 1% in Q2 despite soaring inflation and higher interest rates.
The fundamental drivers that TOL noted contributed nicely in Q2, paving the way for an 83% jump in EPS yr/yr to $1.85. At the same time, sales grew 18% yr/yr to $2.28 bln. Driving TOL’s record quarterly sales, average home price climbed to approximately $908K.
TOL’s wealthier customer base tends to have higher incomes and net worth while benefiting from considerable price appreciation in their existing homes.
Additionally, around 20% of TOL’s customers pay all cash. Meanwhile, those who utilize debt financing take out a roughly 70% loan-to-value mortgage.
The mortgages are also typically classified as jumbo mortgages, which boast rates 0.75 pts lower than the conforming rate.
Tight supply contributed to TOL trimming its FY22 delivery guidance to 11,000-11,500 from prior guidance of 11,250-12,000.
Bottom line, even though new home demand has moderated over the past month from the unprecedented pace of the past couple of years, as inflation and rising interest rates have dampened consumer sentiment, TOL still delivered solid Q2 results. The company’s land acquisition strategy, per which much of the land was contracted for pre-pandemic, provides it with sufficient land needed for sizable growth well into the future. Although home builders will likely face considerable challenges in the short run if inflation continues unabated and interest rates keep rising, TOL’s wealthy clientele should help provide some defense.
