Toll Brothers (NYSE: TOL) jumped 4% higher following strong Q2 earnings in which the company achieved a quarterly record for earnings, beat expectations on the top and bottom-line, and issued guidance above analysts' forecasts. Currently, TOL is trading about 5% off its all-time high which it set earlier in May.
It's not entirely surprising given anecdotal and official data about the housing market. Prices are steadily rising due to a shortage of available houses. While this is not optimal for prospective buyers, it's ideal for homebuilders.
Inside the Numbers
In Q2, Toll Brothers reported EPS of $1.01 which topped analysts' expectations of $0.80 per share. This marks the fourth straight quarter that Toll Brothers topped earnings expectations and is another indication that analysts continue to underestimate its strength as well as the strength in the housing market. Last quarter, the company reported $0.76 per share, while analysts were looking for $0.49 per share.
Revenue also came in significantly higher vs expectations at $1.9 billion vs $1.6 billion. Currently, the company expects $1.39 in EPS and $2.2 billion in revenue for Q3 and $5.29 in EPS, and $8.4 billion for the full year.
In the quarter, Toll Brothers sold a total of 2,271 homes. Net signed contract units were up 97%, while this figure was down 22% last year which illustrates the improvement in the market for luxury homes. Currently, Toll Brothers has a backlog of $8.7 billion which is a 58% increase from last year and higher than estimates of $8.3 billion.
Another important metric is gross margins on home sales. Basically, the cost of inputs to build a house is rising like lumber and labor. It would be concerning if margins are contracting as a result. However, margins came in better than expectations at 24% which shows that costs are being passed onto consumers.
Stock Price Outlook
Analysts have been hiking Toll Brothers' estimates all year, yet the company is still beating them. Further, Toll Brothers has a forward PE of 9.3. This only makes sense if one assumes that the housing market is about to slow down.
If the housing market's strength will continue, then Toll Brothers remains a fantastic opportunity despite its gains. Given that housing still has more room to move higher given the positive fundamentals, Toll Brothers has the potential for continued earnings growth and multiple expansion.