Did Toll Brothers’ Earnings per Share Rise in Fiscal 2Q16?



Toll Brothers’ fiscal 2Q16 earnings

For fiscal 2Q16, Toll Brothers’ (TOL) earnings were $89.1 million, or $0.51 per share, versus net income of $67.9 million, or $0.37 per share, in fiscal 1Q16. The company beat Wall Street’s expectation of $0.46 per share.


After Toll Brothers reported fiscal 2Q16 earnings on May 24, 2016, its stock rose by $2.41 to close the day at $29.51. Also, Toll Brothers’ SG&A (selling, general, and administrative) expenses fell as a percentage of revenues to 11.5% in fiscal 2Q16 from 12.6% in the same quarter last year.

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Operating income rose

Homebuilders do have some operating leverage, meaning that costs don’t necessarily rise at a fixed percentage as revenues rise. Thus, 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 rose to 10.5% of revenues compared to 7.8% a year ago. Costs are increasing for other homebuilders such as Lennar (LEN) and CalAtlantic Group (CAA).

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

Management’s comments on the state of the industry

Douglas C. Yearley, Jr., Toll Brothers’ CEO, stated, “Our revenues this quarter were up 31%, compared to last year while pre-tax income rose 62% and net income rose 31%. Improvements in gross margin, SG&A leverage and pre-tax margin contributed to a significant earnings jump this quarter.”

“Our contracts this quarter rose 3% in both dollars and units compared to one year ago. This modest growth was achieved despite a decline of 93 units in California contracts compared to one year ago. We believe the California market is still strong. Both Southern and Northern California were among our top 5 regions in contracts per community this quarter. Our drop in California contracts reflects a temporary lack of inventory for sale; strategic price increases we have implemented to meter out sales in communities with large backlogs; and the lingering impact on our Porter Ranch community of a leak from a nearby natural gas storage facility, which appears to be heading toward a positive resolution.”

Note that changes in asset prices will probably affect Toll Brothers more than entry-level homebuilders such as PulteGroup (PHM) and D.R. Horton (DHI).

In the final part of this series, we’ll look at Toll Brothers’ geographic results in fiscal 2Q16.


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