Low interest rates and short supply have helped to build the strongest housing market in decades, according to
CEO Douglas C. Yearley.
The CEO’s comments came Monday evening, as the home builder reported its result for its fiscal fourth quarter and full year. The company reported GAAP earnings per share of $1.55 for the fiscal fourth quarter and $3.40 per share for fiscal 2020, beating analysts’ estimates by 25.2% and 9.6%, respectively, according to FactSet.
In a release, Yearley said the fourth quarter’s 3,407 net signed contracts, with a value of $2.74 billion, “were the highest totals for any quarter in our history.” Demand remained strong through the six weeks ended Dec. 6, the first month and a half of its fiscal 2021, he said. Nonbinding reservation deposits, which the company says are a precursor to contracts, were 48% above the year-earlier level.
“We are currently experiencing the strongest housing market I have seen in my 30 years at Toll Brothers and we continue to increase prices in nearly all of our communities as we focus on driving profitability and managing growth,” Yearley said in the release. He cited low interest rates, a limited supply of housing, a “renewed appreciation for the home as a sanctuary,” and the flexibility working from home provides to home buyers as reasons for the market’s strength.
The optimism did little for the company’s stock, which rose ahead of earnings and fell after the announcement. Most builders’ stocks were trading lower Tuesday morning, but Toll Brothers was harder hit than most, with a loss of 7.3%. Stocks have been on a bumpy ride across the sector: Many rose to new highs early this fall, only to come under pressure as rising yields on Treasury debt have led to concern that mortgages will become more expensive.
BTIG analyst Carl Reichardt said the stock fell because the company’s forecasts for gross margins and deliveries in the current quarter were less upbeat than expected. “The guide seems at least in part driven by strong volume already delivered in 4Q which renders backlog thinner,” Reichardt wrote. “Expectations for a margin beat this [quarter] may also be playing a role.” Reichardt restated his Sell rating and wrote he would re-evaluate his target of $40 for the company’s stock price after a conference call scheduled for Tuesday morning.
Shares were at $45.71 near midday.
Toll Brothers says it expects to deliver 1,675 homes with an average price between $780,000 and $800,000 in the first quarter of 2021, achieving a home-sales gross margin of about 22.4%. For the full year, the company expects to hand over to buyers between 9,600 and 10,200 homes, with an average price between $790,000 and $810,000 and an adjusted home sales gross margin of about 24.1%.
In the earnings release, Toll Brothers announced an update to how it calculates adjusted home sales gross margin, saying commissions paid to third-party brokerages would be reclassified as selling, general and administrative expenses from the cost-of-home-sales-revenue category. The company said the change increased both the company’s adjusted gross margin and its SG&A expenses by about 2 percentage points.
In a note restating his Outperform rating, Raymond James analyst Buck Horne said, while the company’s fourth-quarter results were strong, “we also acknowledge that a surge of year-end home deliveries likely pulled forward revenue previously expected next year, leading to tepid F1Q21 guidance.”
In a Tuesday note, Wedbush analyst Jay McCanless restated a call of Outperform on the stock, but cut his price target to $53 from $57. He said that while bulls may focus on the CEO’s comments, the company’s stronger-than-expected orders, and its gain in first-quarter 2021 deposits, bears would likely take note of the lower-than-expected guidance for prices and margins in 2021.
Analysts are split on Toll Brothers stock. Seven call the stock a Buy, or the equivalent, six say it is a Hold, and five cite it as a Sell or its equivalent.