The largest United States luxury-home builder, Toll Brothers (TOL, Financial), reported outstanding financial results for the third-quarter 2014. Its revenue grew 53% while its earnings skyrocketed with triple-digit growth rate of 110% for the third quarter. Increasing demand for homes and rising prices fueled its performance for the quarter.
However, there were raised eyebrow on declining new orders that could hurt its sales in the current quarter. Its sales contracts fell 6% during the quarter. Its peers such as Lennar (LEN, Financial) and D.R. Horton (DHI, Financial) to PulteGroup (PHM, Financial) and Standard Pacific (SPF, Financial) also witnessed deceleration in orders.
Toll Brothers, for the third quarter, posted revenue of $1.06 billion as compared to $686 million in the same quarter a year earlier. Also, its net income for the third quarter came in at $97.7 million or earnings of $0.53 per share as against $46.6 million or earnings of $0.26 per share in the same period last year. The consensus was estimating earnings of $0.45 per share on the revenue of $986.87 million for the quarter.
Pent-up demand to maximize its performance
Toll Brothers should benefit from the underlying pent-up demand. The company expects the pent-up demand to continue build up in 2014 and into 2015. Moreover, the company remains upbeat constructing new communities in attractive locations. It is witnessing good performance in the higher growth markets such as Coastal California, Texas and the urban New York City area that should accelerate its performance going forward. Also, it has relatively a better land portfolio with rich quality that should complement its growth during this pent-up demand, which is yet to be fully released.
In addition, Toll Brothers is seeing positive momentum in its traffic per community basis. It expects the pattern to continue in the current quarter and into 2015. Toll Brothers is expected to open a number of new City Living Condo communities for sale in Manhattan and Metro Washington, D.C. These communities include 400 Park Avenue South, Park Avenue, the Sutton, and a JV at 53rd Street and First Avenue as well as Hampden Row in Bethesda, Maryland.
Strong apartment business
Toll Brothers is aggressively ramping up its apartment living division with its joint venture. It has currently five joint ventures and over 1,900 units under construction. Also, the company has strong pipeline of 2,250 units to be approved. In fact, this is in addition to already existing two joint venture communities that have strong 1,450 units under construction.
These communities are expected to fuel up its sales as these communities are in the upscale urban and suburban markets, where the company has strong presence. Additionally, the company is planning to expand its City Living brand. It remains committed to extend its reach in the luxury market. The company has large diversified land portfolio with established Toll Brothers City Living brand and its Apartment living offerings. This creates strong position for the company to tap the extra market share amidst improving market conditions. This will undeniably generate positive cash flow for the company and create value for shareholders.
Ending remarks
Toll Brothers looks good to tap the unleashing pent-demand. Also, it has quite an attractive Apartment living division with quality land portfolio that should assist the company to accelerate its sales this quarter. The analysts expect its earnings to grow at CAGR of 36.41%, greater than average industry CAGR of 18.59% for the next five years. This indicates sound growth prospects for the company in the future.
Moreover, its valuation metrics look good and shares cheap valuation for the stock. It is trading at the trailing P/E of 20.95 and forward P/E of 16.08 with PEG ratio of 0.59 that creates remarkable growth opportunity for the stock in the long-run. It has profit and operating profit margins of 8.41% and 10.45% respectively for the last twelve months. Its balance sheet carries total cash of $386.65 million and has total debt of $3.38 billion.
