Toll Brothers’ (TOL) Earnings Report Looks Like A Fixer Upper, But Closer Look Reveals Some Promise
2:59 pm Wednesday, August 24th, 2022
After a spate of recent bad news for the housing market, expectations for Toll Brothers’ (TOL) Q3 earnings report were subdued, as evidenced by the stock’s 7% drop since last week. As anticipated, the luxury home builder encountered a challenging environment as rising mortgage rates, macroeconomic uncertainty, and a volatile stock market weighed on demand. Consequently, deliveries decreased by 7% yr/yr to 2,414, causing TOL to come up short versus Q3 revenue expectations. Perhaps even more troubling, quarterly cancellations as a percentage of signed contracts in the quarter skyrocketed to 13.0% from 3.1% in the year-ago quarter.
That surge in cancellations came even as TOL ramped up its incentives for home buyers. Specifically, the company disclosed that August incentives averaged about $30K, compared to $22K in July, and $15K in June. The more generous incentives had a limited effect on cancellations, though, and they also didn’t spark much demand — at least not initially. Net signed contracted homes in Q3 plunged by 60% yr/yr to 1,266. Furthermore, TOL trimmed its FY22 delivery guidance for the second time this year. After lowering its delivery forecast to 11,000-11,500 from 11,250-12,000 last quarter, TOL is now guiding for deliveries of 10,000-10,300.
The improved home sales gross margin, and accompanying EPS beat, seem to be the lone bright spots in an otherwise dismal report. Therefore, it seems strange that TOL is trading higher, but there are a couple explanations for the stock’s strength.
Most importantly, CEO Douglas Yearley commented that TOL is seeing signs of increased demand in recent weeks as sentiment improves and as buyers return to the market. He added that average weekly deposits during the first three weeks of August were up 25% versus July. This is an encouraging development, indicating that the easing of inflationary pressures is boosting home buyer sentiment.
Like a teardown home that’s in need of major renovations, TOL’s quarterly report had plenty of blemishes and delinquencies. However, also like a teardown home, there is a promise for better days ahead, thanks to a recent strengthening of demand.
