Are luxury homebuilders coming back?

With the gradual economic recovery and relatively low interest rates, customers who had been delaying purchases are now moving forward.

By Zacks.com Aug 23, 2012 3:37PM

Home under construction © CorbisBy Zacks Equity Research


Toll Brothers (TOL), one of the country's leading luxury homebuilders, reported earnings of 26 cents per diluted share in its fiscal third quarter, up 24 cents from a year earlier. The year-over-year surge in earnings was driven by strong sales and volume growth in the quarter. 


Reported earnings surpassed the Zacks consensus estimate of 18 cents per diluted share for the third quarter of fiscal 2012.


Revenue

The company reported revenue of $554.3 million in the quarter, up 41% year over year, driven by volume growth. Reported revenue surpassed the Zacks consensus estimate of $505 million.


The number of homes delivered increased to 963 units, up 39% year over year due to a rise in demand and low competition for luxury homes.


Net worth of the contracts signed during the quarter was $674.4 million, up 66% year over year. Contracts were signed for 1,119 units, up 57%. Contract growth was driven by the company’s strong brand name and attractive land positions.


The average price of net signed contracts was $576,000 in the third quarter of fiscal 2012, up 1.2% year over year. The company had a backlog of $1.62 billion (up 59%) and 2,559 units (up 44%).


Quarter highlights

The company’s gross margin (excluding interest and write-downs) grew 100 basis points to 24.4%, driven by better sales and volumes. Its reported pre-tax income (excluding write-downs) was $46.1 million, up significantly from $24.1 million in third quarter of 2011.


The company entered into two joint ventures during the period. The first was with Starwood Capital to build a luxury eco-friendly hotel in the condominium community in Brooklyn Bridge Park on the New York City East River. The company expects to complete the project by spring of 2014.


The second venture was with Shea Baker Ranch, a member of the Shea family of companies, to develop Baker Ranch, a master-planned community in Lake Forest, Calif. These acquisitions will strengthen the company’s position in the industry by increasing the luxury quotient of homes in the most desirable locations.


With the gradual economic recovery and relatively low interest rates, customers who had been delaying purchases are coming back stronger than expected. Since the existing inventory is inadequate to meet this pent-up demand, there is a supply/demand imbalance. The dearth of land for the construction of homes is also not helping matters.


Therefore, home prices may be expected to increase. Toll Brothers’ strong brand name, wide range of products, attractive land position, strong repute for reliability and quality and robust liquidity position will help the company to maximize the opportunities expected to come with market recovery.


Outlook

Toll Brothers expects to deliver 800 to 1,000 homes in the fourth quarter of 2012. The average price of homes is expected to be in the range of $570,000 to $590,000, which is higher than the previous guidance of $560,000 to $580,000. The company expects margins to decline slightly in the fourth quarter of 2012 based on an expected reduction in the number of deliveries, owing to lower supply in the New York and New Jersey regions.


The company expects to generate home sale revenue between $1.71 billion and $1.84 billion in fiscal 2012. The company raised the guidance for the number of homes delivered in fiscal 2012 to between 3,000 and 3,200 from the previous expectation of 2,700 to 3,200 homes.


Our recommendation

We currently have an "outperform" recommendation on Toll Brothers. The stock carries a Zacks No. 2 rank (short-term "buy" rating).


We are positive about the company’s order growth, stable margins and improved pricing. We believe that the company has benefited from its focus on high priced products, a segment of the housing market that has seen growing demand and limited competition.


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