Toll Brothers (TOL, Financial) is on a roller coaster ride. The company recently released fantastic results for the third quarter. It reported better than expected numbers on both the top line and the bottom line. The company soared mainly due to a good 13% improvement in traffic. But, the declining housing industry is giving an alarming call to companies in the industry. The effect of this can already be seen as Toll Brothers has slowly started seeing a decline in orders due to a rise in the prices of homes. Though the company is in a good financial position, it will be exciting to see how Toll Brothers manages to hold it position in this declining housing market.
Financials and more
Toll Brothers posted impressive financials; its top line grew by 53% to $1.06 billion. Also it posted a robust improvement in the net income. The company’s net income rose by 110% to $97.7 million. On the earnings front, Toll Brothers posted EPS of $0.53 per share. However, Toll Brothers saw a 4% decline in the net signed contract which is a matter of worry for the home builder.
If we see from the financial perspective, Toll Brothers is flying with fantastic increases in the revenue and net income. But there is another side of the coin also. As per the survey and recent movement in the market it can be seen that the housing industry will decline. This might be an alarm for fast-moving Toll Brothers, too. In fact this has affected the company already as, soon after it posted a decline in the orders in its third-quarter earnings call, it dragged down the housing sector stocks. This led the company to lose the number of sales contract by 6%.
The shortfall in the new orders presents a challenging situation in front of Toll Brothers. There is an aggressive price increase in past two years which have hobbled the demands. Toll Brothers should definitely look for a way out of this situation and secure its financial stability. However, the company is well positioned to face this situation and is focusing on various aspects to improve profitability.
Still going strong
But the management of the company seems confident of maintaining their position even under pressure of declining housing industry. Although Toll Brothers has seen some lessening of pricing power, the company doesn’t feel the need to shift its focus on selling spur homes. Toll Brothers thinks that the company is not under pressure. It is mainly counting on its improving bottom line. It is confident that this growth momentum is showing positive signs, and it will continue recovering which will help Toll Brothers to safeguard its financial strength despite a weakening housing industry.
On the other hand Toll Brothers is also seeing some robust performances from many of its target markets such as Coastal California, Texas and Urban New York City area.
In order to ramp up its business, Toll Brothers is undertaking many impressive strategies which are adding meaningfully to the company’s efforts to be profitable in the declining industry. It is focusing on increasing the community count in attractive locations. In the past, Toll Brothers has also made some impressive moves which are paying off now.
Toll Brothers is counting on this initiative as it believes it to be a key factor for many of its buyers in selecting homes. In order to strengthen its position in the market, Toll Brothers is committed to its strategy of finding the best land in the best locations for the best communities for its clients. This will create customer satisfaction and will help Toll Brothers to grow its business.
Moving forward, Toll Brothers’ apartment living division is ramping up. In addition to two already existing joint venture communities, Toll Brother is seeking approval for five new joint venture communities. This will be an addition to Toll Brothers’ objective of expanding its Apartment Living brand. With this it is focusing on broadening its reach to the luxury market which will also be an another source of smooth cash flow for Toll Brothers in future.
Conclusion
Shifting our focus to its fundamentals, Toll Brothers is cheap. The stock can be a good long-term holding as in the next five years, its earnings are expected to grow with a CAGR of 34.00%, which is more than the industry average of 16.19%. Thus, considering all these facts, Toll Brothers is in a good financial position and in the long term, it is expected to get better. So, investors should definitely include Toll Brothers in their portfolio.
