Toll Brothers Beat Earnings, But Are The Numbers Foggy? Here's What Analysts Say

Toll Brothers Inc TOL issued an upbeat earnings report Tuesday — the company's strongest in history.

The report came in above consensus estimates on the top and bottom lines, but Raymond James analysts say 'not so fast,' citing data that could dampen Toll Brothers' outlook in the coming year.

See Also: Analyst Ratings For Toll Brothers

By The Numbers

• Toll Brothers' profit rose to $640.5 million, or $5.63 per share, compared with $374.3 million, or $3.02 per share, a year ago.
• Analysts expected $4.01 per share.
• Revenue rose to $3.71 billion from $3.04 billion a year ago, topping the expectation for $3.17 billion.
• Home sales revenue increased 21% to $3.6 billion.

Toll Brothers' earnings may appear to be weathering the housing recession extremely well at first glance, but much of that earnings was based on backlogged homes from the first half of the year, before mortgage rates shot up.

Read also: 'We're Not In A Frenzy Anymore,' Real Estate Agent Says Amid Home Sellers Pulling Properties Off The Market

Revenues were also boosted by a court settlement related to a natural gas leak in 2015, which added 95 cents per share to its total EPS, Raymond James noted.

“Coincident with the settlement, TOL created a new charitable foundation, donating $10.0 million, resulting in a $138.4 million net pre-tax benefit to earnings in the fourth quarter,” the analysts wrote.

In the fourth quarter, delivered homes by Toll Brothers were up 13%. However, new net signed contracts fell 60%.

“The dramatic increase in mortgage rates since March presents a challenging market as we enter FY 2023,” CEO Douglas Yearley said. “Many homebuyers are on the sidelines, waiting for clarity on the direction of mortgage rates and the overall economy.”

To encourage potential purchasers of newly constructed houses despite slowing sales, several home builders, including Toll Brothers, will give incentives similar to what they did before the covid-19 pandemic.

According to data from John Burns Real Estate Consulting's Director of Research Rick Palacios, nearly 70% of homebuilders the company spoke with were offering some kind of incentive to buyers in backlog, with 17% offering incentives ranging from 76% to 100%, putting pressure on homebuilders' margins.

"We are strategically balancing the delivery of our large, high-margin backlog in FY 2023 with the generation of new sales for future deliveries," Toll Brothers said in a statement.

Depending on Toll Brother’s commentary in its earnings call, its report will have implications for Lennar Corp LEN, and KB Home KBH as well.

Based on management's remarks, it may also affect home-improvement retail chains Home Depot Inc HD, and Lowe’s Companies Inc LOW.

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