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Homebuilding company Toll Brothers (NYSE:TOL) reported revenue ahead of Wall Street’s expectations in Q3 CY2024, with sales up 10.4% year on year to $3.33 billion. Its non-GAAP profit of $4.63 per share was 6.6% above analysts’ consensus estimates.
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Toll Brothers (TOL) Q3 CY2024 Highlights:
- Revenue: $3.33 billion vs analyst estimates of $3.17 billion (10.4% year-on-year growth, 5.2% beat)
- Adjusted EPS: $4.63 vs analyst estimates of $4.34 (6.6% beat)
- Q4 guidance for units delivered of 2,000 missed expectations of roughly 2,150 by 7%
- Q4 average price per delivery of $935k missed expectations of roughly $953k by 2%
- Fiscal 2025 guidance initiated: 11,400 units delivered and $955,000 average price in line with expectations
- Operating Margin: 18.3%, in line with the same quarter last year
- Backlog: $6.47 billion at quarter end
- Market Capitalization: $15.56 billion
Company OverviewStarted by two brothers who started by building and selling just one home in Pennsylvania, today Toll Brothers (NYSE:TOL) is a luxury homebuilder across the United States.
Home Builders
Traditionally, homebuilders have built competitive advantages with economies of scale that lead to advantaged purchasing and brand recognition among consumers. Aesthetic trends have always been important in the space, but more recently, energy efficiency and conservation are driving innovation. However, these companies are still at the whim of the macro, specifically interest rates that heavily impact new and existing home sales. In fact, homebuilders are one of the most cyclical subsectors within industrials.Sales Growth
Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Thankfully, Toll Brothers’s 8.7% annualized revenue growth over the last five years was decent. Its growth was slightly above the average industrials company and shows its offerings resonate with customers.Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Toll Brothers’s recent history shows its demand slowed as its annualized revenue growth of 2.7% over the last two years is below its five-year trend.
This quarter, Toll Brothers reported year-on-year revenue growth of 10.4%, and its $3.33 billion of revenue exceeded Wall Street’s estimates by 5.2%.
Looking ahead, sell-side analysts expect revenue to remain flat over the next 12 months, a deceleration versus the last two years. This projection is underwhelming and indicates its products and services will see some demand headwinds.
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Operating Margin
Toll Brothers has been an optimally-run company over the last five years. It was one of the more profitable businesses in the industrials sector, boasting an average operating margin of 15%. This result was particularly impressive because of its low gross margin, which is mostly a factor of what it sells and takes huge shifts to move meaningfully. Companies have more control over their operating margins, and it’s a show of well-managed operations if they’re high when gross margins are low.Analyzing the trend in its profitability, Toll Brothers’s operating margin rose by 10.6 percentage points over the last five years, as its sales growth gave it immense operating leverage.
In Q3, Toll Brothers generated an operating profit margin of 18.3%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.
Earnings Per Share
Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.Toll Brothers’s EPS grew at an astounding 30.5% compounded annual growth rate over the last five years, higher than its 8.7% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.
Diving into Toll Brothers’s quality of earnings can give us a better understanding of its performance. As we mentioned earlier, Toll Brothers’s operating margin was flat this quarter but expanded by 10.6 percentage points over the last five years. On top of that, its share count shrank by 28.5%. These are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.
Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.
For Toll Brothers, its two-year annual EPS growth of 17.5% was lower than its five-year trend. We still think its growth was good and hope it can accelerate in the future. In Q3, Toll Brothers reported EPS at $4.63, up from $4.11 in the same quarter last year. This print beat analysts’ estimates by 6.6%. Over the next 12 months, Wall Street expects Toll Brothers’s full-year EPS of $15.27 to shrink by 3.8%.