Toll Brothers (TOL, Financial) recently reported a 24% increase in the value of signed contracts to $873.2 million primarily due to a 16% expansion in the number of units to reach 1,063 units during the first quarter. It also witnessed an expansion in the average price of total signed contracts to $821,500 in the first quarter of 2015 from $766,100 during the same period last year. The premium home developer launched 1,091 units at an average price of $782,300 during the quarter, depicting a 13 percent expansion from the last year’s quarter average price of $693,600.
What's driving growth
The home building major gained significantly from its stable diversification strategy. Toll Brothers is leading the luxury home market spread across the suburban Washington, D.C., and Boston Mid-Atlantic corridor. Toll Brothers' key growth in the West and South coupled with an impressive growth in urban centers has enabled it to diversify into several other product lines and sites. Particularly, 29% of its signed contracts during the quarter were from California and having an average value of $1.1 million. The Dallas division of Texas emerged as a major contributor and accounted for 11% of the contracts' value.
The significant increase in the number of signed contracts by Toll Brothers is further supported by the rapid improvement in the housing market conditions and also highlights the key diversification strategy implemented by the company.
Encouraged by its robust first quarter performance, Toll Brothers expanded its full-year outlook for pricing and delivery. The previous guidance for the company had forecast to deliver homes in the range of 5,000 to 6,000 homes at an average price in $710,000 to $760,000 range, the improved guidance expects to deliver homes in 5,200 to 6,000 range valued in the range of $725,000 to $760,000. The enhanced guidance is primarily due to the company’s better quality land positions, continued robust sales and forecast solid growth in home delivery for its City Living portion in New York City in the fiscal year 2016.
A strong outlook
Toll Brothers’ solid first-quarter results, coupled with a positive outlook for the remaining fiscal year 2015, turns it into a valuable investment for investors. Moreover, the company was lately tagged as the highest trusted home builder in America. Experts have provided a "buy" rating to the stock encouraged by its solid expected growth in 2015 and 2016 as well. The continued expansion of Toll Brothers is believed to be enabled by a healthy inventory of quality land sites and the ongoing increase in jobs with some key Federal efforts.
The optimistic growth outlook projected by Toll Brothers signifies the robustness of its expansion strategy along with a significant projected improvement in the overall global housing market conditions.
Toll Brothers has significantly enhanced its Californian presence by acquiring Shapell Homes and many other strategic and timely coastal California land acquisitions. During the quarter, California delivered 29% of net value of its signed contracts at an average cost of nearly $1.1 million. It concluded the quarter with about 25 selling communities in California as compared to just seven last year with its sales per community enhancing approximately 30%.
Toll Brothers estimates its average price of homes delivered in the second quarter 2015 to be in the $720,000 to $740,000 range, and the company’s segments are believed to contribute the least for the second quarter.
The planned new acquisitions executed by Toll Brothers are forecast to drive significant top line and bottom line growth for the company and thus benefiting the key stakeholders.
The consensus estimate of analysts surveyed by Thomson suggests the investors to hold the stock. The targeted mean price of the analysts for Toll Brothers indicate approximately 10 percent decline. In addition, the stock has underperformed the overall markets.
Conclusion
The PEG ratio of 1.21 indicate slightly slower stock growth and comparable to the industry’s average of 1.03. The profit margin and diluted EPS of 9.12% and 2.03 respectively look appealing for the investors. However, Toll Brothers need to optimize its debt-laden balance sheet with huge total debt of $3.37 billion against smaller total cash position of $510.92 million only to plan future strategic investments.
