Toll Brothers (TOL, Financial) reported a 33% growth in its Q1 2015 revenue to $835.5 million, beating estimates that had pegged the figure at $773.5 million, on the back of a boost in housing prices in the luxury home segment. Net income grew a whopping 78% to $81.3 million in the quarter, resulting in an EPS of 44 cents a share compared to the consensus estimate of 30 cents a share. Consequently, the company announced an upbeat outlook for the remainder of fiscal 2015. The company’s growth is a contrast to the 4.9% drop in sales figures for existing homes in January 2015, as reported by the National Association of Realtors. Following the release of the earnings results, the Toll Brothers stock rose to 4.3% during the day’s trading.
Growth in volume and average price of signed contracts
Toll Brothers witnessed a 24% growth to $873.2 million in signed contracts, translating to a 16% growth in units to touch 1,063 units, in the first quarter. The company also reported growth in the average price of net signed contracts from $766,100 in Q1 2014 to $821,500 in Q1 2014. The luxury home builder delivered 1,091 units during the quarter at an average price of $782,300, indicating a 13 percent growth from the prior-year quarter’s figure of $693,600. Moreover, gross margin, excluding write-downs and interests, grew to 27.3%, compared to 24.4% in the first quarter of 2014.
The company attributed the gains to its enduring strategy of diversification. While Toll Brothers dominates the luxury home market along the suburban Washington, D.C. to Boston Mid-Atlantic corridor, the company’s growth in the South and West as well as in urban centres has allowed it to expand into more product lines and locations. For instance, 29% of the company’s signed contracts for the quarter came from California, with an average price of $1.1 million, while Texas, with the Dallas division being the key contributor, accounted for 11% of the value of contracts.
The company, which also diversified into the construction of high-rise condominiums and apartments during the year, also saw interest income as well as a lower-than-expected tax rate benefiting its bottom line. Toll Brothers’ City Living division accounted for 5% of the value of contracts with the average unit price hovering around $2.3 million.
Robust 2015 outlook
On the back of its strong first quarter performance, Toll Brothers raised its full-year outlook in terms of delivery and pricing. While the company’s earlier guidance had projected home deliveries in the 5,000-6,000 range at an average price of $710,000-$760,000, the revised guidance foresees the delivery of 5,200-6,000 homes priced at an average of $725,000- $760,000. The revised guidance is based on the company’s high quality land positions, enduring strong sales and projected growth in delivery for its City Living division in New York City during FY 2016.
Further, in line with prior guidance, Toll Brothers projected full-year 2015 gross margins (pre-impairments and pre-interest) of around 26%. While the builder ended its first quarter with 258 selling communities, compared to 263 selling communities in the end of 2014, and 238 at the end of the prior-year quarter, the company still foresees ending fiscal 2015 with 270 to 310 selling communities.
While the National Association of Realtors cited an impending appreciation in home prices in its recent release, Toll Brothers said it expected its buyers – who often sell an existing home to move up – to have more money to invest in the new home. Further, the company expects to benefit from factors such as an increase in the quantity and quality of jobs in the market as well as recent initiatives by the federal government to increase availability of mortgage.
While industry peers such as KB Home (NYSE:KBH) and Lennar (NYSE:LEN) projected lower gross margins for at least part of the current fiscal on rising costs, Meritage Homes (NYSE:MTH) reported a 48% increase to 606 in home orders in January 2015 on the back of a 146% surge in East region orders.
Final thoughts
Toll Brothers’ robust Q1 results combined with an upbeat outlook for the remainder of fiscal 2015 makes it an attractive avenue for investors. Further, the company recently topped the charts as the most trusted home builder in America. With a good inventory of quality land positions and the favorable headwinds of growth in jobs and certain Federal initiatives, experts foresee a steady run for Toll Brothers in 2015 through to 2016. Consequently, the Toll Brothers currently carries "buy" guidance.
