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Why Toll Brothers Has Reported a Drop in Earnings per Share

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SG&A and operating margins

For fiscal 1Q16, Toll Brothers’ (TOL) earnings were $73.2 million, or $0.40 per share, down from its net income of $81.3 million, or $0.44 per share, a year ago. This was in-line with Wall Street expectations.

Toll Brothers’ stock rose by $0.99 on the day to reach $27.02 per share. Also, Toll Brothers’ selling, general, and administrative expenses (or SG&A) rose as a percentage of revenues in fiscal 1Q16 to 13.1% from 12.5% in the same quarter last year.

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Operating income rose

On a sequential basis, SG&A rose from 8.7% to 13.1%. The builders do have some operating leverage, meaning that costs don’t necessarily rise at a fixed percentage as revenues rise. So, margins can expand as the company grows.

For example, if revenues rise 45%, the company doesn’t need 45% more people in the corporate office.

Toll Brothers’ operating income fell to 10.2% of revenues compared to 11.4% a year ago. Costs are increasing for other builders such as Lennar (LEN) and CalAtlantic (CAA).

If you are interested in investing in the homebuilding sector via an ETF, you can consider the S&P SPDR Homebuilders ETF (XHB).

Management comments on the state of the industry

Douglas C. Yearley, Jr., Toll Brothers’ CEO, stated, “Our business remains solid as customers continue to demonstrate a healthy appetite for luxury homes. First quarter contracts and backlog were up 24% and 34%, respectively, in dollars, compared to one year ago.”

Yearley continued, “Deposits and contracts signed in the first three weeks of February, the start of our second quarter, were basically flat compared to the prior year. This is understandable given the recent stock market decline and global economic uncertainty. Positively, traffic was up 13% over the same three weeks and appears to be improving in quality, which gives us reason for optimism for the balance of the spring selling season.”

Note that Toll Brothers will probably be more affected by changes in asset prices than entry level builders such as PulteGroup (PHM) and D.R. Horton (DHI).

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