Toll Reports Solid Quarter, But Orders Decline
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Toll Brothers posted a solid third quarter with a 110 percent jump in net income to $97.7 million, sales of 1,444 (an almost 400 home increase), average sales price that rose 12 percent to $732,000, and traffic increase of 13 percent in the quarter.
But it was the 6 percent year-over-year decline in order growth that left analysts feeling uncertain. While UBS raised its earnings-per-share target in the fourth quarter, it lowered them for 2015, citing backlogs, community count expectations, and diminishing pricing power. Toll also lowered its year-end community count to 255 to 275, down from 250 to 290.
“The freshest data points surround orders, which missed expectations by a decent margin,” said a Well Fargo research report. “Further, August orders are down 7 percent in total [despite a 14-percent higher community count]. Toll noted that traffic/community was up 19 percent in August, but based on third-quarter trends, orders don’t appear to be tracking, suggesting a lack of buyer urgency. Overall, we see Toll as a well-positioned builder but currently it just appears to us that it’s a waiting game on better demand.”
Toll’s positioning helped it push margins 160 basis points in the third quarter. Future growth will likely be driven by its City Living brand, which could claim as much as 11 percent of its total revenue in 2015. Currently, the company has City Living offerings opening in the New York metro area, Philadelphia, and Washington, D.C., but it’s looking in other markets.
“We’re looking to expand our City Living brand,” Doug Yearley, Toll’s CEO on today’s earnings call.
August saw non-binding deposits rise 18 percent gross, and 4 percent per community, but contracts were down 7 percent gross and 19 percent year-over-year per community.
“This raises a number of questions, as buyers still appear to be interested in a Toll home, but are suddenly not willing to pull the trigger,” said a Raymond James analyst note. “Higher re-sale inventory, growing incentives from other builders, and global uncertainty given recent headlines could all be factors. Nevertheless, Toll specifically noted it sees no need to increase incentives or reduce price, given it maintains the best community locations in the industry and has very little unsold spec inventory to sell.”
On its earnings call, analysts questioned Toll executives about the divergence between traffic and contracts. Currently, the company is turning about 2.7 percent of traffic into contracts. Last year, that number was at 3.5 percent, but between 1994 to 2004 only 1.8 percent of traffic converted to contracts.
Still, the 13 increase in traffic was promising.
“When you get traffic rate, it’s an indication that the entire market is playing with housing again,” said Bob Toll, executive chairman of the board on the earnings call.
Come back tomorrow to http://www.AshfordCP.com/blog where Kennesaw’s Ashford Capital Partners’ Managing Partners Matthew Riedemann brings you news you can use.