Toll Brothers stock jumps amid 'marked increase in demand' to start 2023
Toll Brothers (TOL) stock rose Wednesday after the homebuilder reported results Tuesday evening that beat expectations as the housing market shows continued signs of rebounding after a challenging 2022.
The luxury homebuilder posted quarterly results for its fiscal first quarter that topped Wall Street expectations, with earnings per share coming at $1.70 against the $1.40 expected by analysts, according to data compiled by Bloomberg. Revenue in the quarter totaled $1.75 billion in Q1 for 2023, higher than the $1.73 billion expected by analysts.
Toll Brothers booked home sales revenue that rose 4% compared to the same period last year, delivering 1,826 homes. The company also affirmed guidance for this year, saying it expects to deliver earnings per share in a range between $8.00 and $9.00 and an adjusted gross margin of 27%.
Shares of Toll Brothers were up more than 3% following these results.
"Since the start of the calendar year, we have seen a marked increase in demand beyond normal seasonality as buyer confidence appears to be improving," Douglas C. Yearley, Jr., Toll Brothers' chairman and chief executive officer, wrote in the company's earnings release.
On a call with investors early Wednesday, Yearley added: "We attribute the increase in demand to [improved] buyer sentiment as inflation appears to be receding and the overall economic outlook seems to be more stable than it was a few months ago."
Toll Brothers said new signed contracts dropped 51% from the same period last year to 1,461 homes in its latest quarter, with dollar value declining 51% from a year ago. Regionally, the West, including California, Oregon, and Washington, faced the biggest drop in contracts signed compared to its South region.
Contracts canceled reached 14.3% of new deals in the period, down from the 20.8% seen in Toll's fourth quarter. Cancellations totaled 3% of the company's beginning backlog in the quarter, up from 1.4% from the previous year.
The company ended the quarter with a backlog of 7,733 homes valued at $8.6 billion, down 21% from the same period last year.
As Toll Brothers looks ahead, the company anticipates to deliver about 2,050 to 2,150 homes with an average selling price of $990,000 in the current quarter. Overall, the company expects to deliver about 8,000 to 9,000 homes with an average price of $975,000 by the end of this year.
Housing demand plummeted over the last year in the face of higher rates, with the 30-year fixed mortgage rate reaching 6.32% from the 6.12% the week prior, according to Freddie Mac. But now that spring sales season is underway, Toll Brothers remains optimistic as "consumer confidence is improving, buyers are coming off the sidelines."
"The most telling sign that these fundamentals are real and meaningful is the fact that rates didn't have to go back to 3.5% or even 5.5% for buyers to come back out," Yearley said on the call.
In fact, over the past week, Toll Brothers saw the most deposits they have seen in a month even as rates have moved higher. "That was really encouraging…Traffic is really good. Web activity is really good. We have continued to create urgency in the sales center because we are dropping incentives. We are raising prices and the buyers are out."
Still, the picture remains challenging for first time buyers given the recent mortgage rate volatility. Mortgage applications out Wednesday showed a 13.3% drop from the prior week, according to the Mortgage Bankers Association.
Meanwhile, both single family and total existing homes sales dropped to the lowest level since the housing market bottom after the great financial crisis, according to data from Bespoke Investment Group. The number of homes available for sale reached a 20-month high, while the ratio of inventories to sales almost entirely recovered to levels that held prior to the pandemic.
Recent data on homebuilder confidence, however, shows sentiment continues to improve even amid a bumpy road for the housing recovery.
Looking ahead, Yearley told analysts that "we're not out of the woods."
"We understand the volatility to rates. We understand the clouds over the economy. They haven't all cleared yet. It's looking better inflation is coming down," the executive said. "Our buyers are less impacted by rates."
"And the buyer doesn't have a mentality of ‘I'm locked into this 6.5% rate for 30 years. [Refinancings] happens all the time. Our buyers are sophisticated. Most of them have owned homes before. Almost all of them have [refinanced] in their life," he added.
Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv
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