Investment research report for TOL

Table of Contents

Executive Summary
Valuation Analysis
Industry and Competitors Analysis
Financial Analysis
Earnings Call Multi-Year Analysis
Financial Statements Multi Year
Insider Trading Analysis
Management Compensation Benchmark Analysis
Proxy Statement Analysis
News Analysis
Technical Indicators Analysis
Financial Statements Annual
Financial Statements Quarterly
Earnings Call Analysis

Executive Summary

Company Description

Toll Brothers, Inc. (TOL) is a leading builder of luxury homes and communities across the United States. The company operates in five geographic segments and focuses on the luxury and affordable luxury segments of the housing market.

Key Insights for Long-Term Investors

Strong Financial Position and Capital Allocation

Toll Brothers maintains a robust balance sheet with ample liquidity and a conservative debt-to-capitalization ratio. The company is committed to returning capital to shareholders through share buybacks and dividends, reflecting its financial discipline.

Pricing Power and Margin Resilience

Despite cost pressures, Toll Brothers has demonstrated consistent pricing power, allowing them to raise prices and maintain strong gross margins. The company’s focus on protecting margins, even in a softening demand environment, is encouraging for long-term investors.

Disciplined Land Acquisition and Growth Opportunities

Toll Brothers takes a prudent approach to land acquisitions, with increased use of options and higher return thresholds. The company sees growth opportunities from favorable migration trends and is expanding its footprint in Sunbelt and Mountain states.

Operational Improvements and Diversification

Toll Brothers is focused on improving operational efficiency through initiatives like increasing spec home construction and optimizing floor plans. The company has successfully diversified into more affordable luxury homes and rental properties, expanding its addressable market.

Overall, Toll Brothers’ consistent execution, financial discipline, product diversification, and focus on operational improvements position it well for long-term success, even amid potential market volatility. The key will be the company’s ability to maintain its pricing power, margins, and return metrics through various housing cycles.

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Valuation Analysis

PE Ratio

The PE ratio for the company TOL is as follows:
– Low: 4.688937213455252
– Base: 9.204890631147688
– High: 13.720844048840124

PB Ratio

The PB ratio for the company TOL is as follows:
– Low: 0.8711776029394125
– Base: 1.186846817171521
– High: 1.5025160314036294

EPS Growth

The EPS growth for the company TOL is as follows:
– Low: 12.16%
– Medium: 24.48%
– High: 30.85%

Unable to provide price targets since this company’s financials are highly unstable. We recommend not to hold this stock in your portfolio.

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Industry and Competitors Analysis

Toll Brothers, Inc. (TOL) and the Residential Construction Industry

Based on the information provided, TOL (Toll Brothers, Inc.) operates in the residential construction industry, building luxury homes and communities across the United States. Some key points about TOL and its competitive positioning:

TOL’s main competitors appear to be other major homebuilders like D.R. Horton (DHI), Lennar (LEN), PulteGroup (PHM), KB Home (KBH), NVR, Beazer Homes (BZH), Hovnanian (HOV), M/I Homes (MHO), and Taylor Morrison (TMHC).

TOL focuses on the luxury home segment, while competitors like DHI, LEN, PHM, KBH cater more to entry-level and move-up buyers. NVR and TMHC also have a luxury focus similar to TOL.

In terms of revenue, TOL ($9.99B in 2023) is smaller than the largest public homebuilders like DHI ($35.46B) and LEN ($34.23B), but larger than KBH ($6.41B) and others.

TOL’s gross margins (26.4% in 2023) are relatively healthy compared to peers, indicating its focus on higher-priced luxury homes.

However, TOL’s net income margin of 13.7% in 2023 lags behind some competitors like NVR (17.1%) and DHI (13.4%), suggesting room for improvement in profitability.

TOL has a relatively strong balance sheet with moderate debt levels compared to equity.

Overall, while not the largest public homebuilder, TOL appears to be a significant player focused on the luxury home market segment, competing with companies like NVR and the luxury divisions of larger builders. Its margins and profitability suggest a reasonably competitive positioning in its targeted luxury niche.

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Chart of Competitors

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Financial Analysis

Financial Strength

The company has a relatively healthy current ratio around 3.5-4, indicating it can meet short-term obligations. However, the debt/equity ratio is on the higher side around 0.4-0.6, suggesting a leveraged capital structure. Interest coverage ratios are sometimes negative, indicating potential issues covering interest expenses.

Growth Potential

Revenue growth has been volatile, ranging from -50% to +50% in different quarters. Net income growth has also fluctuated significantly. Analyst estimates project solid revenue and earnings growth over the next few years, indicating expectations for future growth.

Competitive Advantage

As a luxury homebuilder, Toll Brothers likely has some pricing power and brand value. However, financial metrics don’t clearly highlight durable competitive advantages.

Management Quality

The fluctuations in growth rates and profitability metrics could signal inconsistent execution by management. High debt levels may be a strategic choice by management to fund growth.

Shareholder Friendliness

The company pays dividends, though the payout ratio is relatively low around 5-10%. Share buybacks are not evident from the data provided.

Valuation

P/E ratios have varied widely from 1.9x to 26.9x, making valuation assessment difficult. Price/Book ratios are mostly below 2x, which could be considered undervalued for the sector. Analyst EPS estimates for future years provide some baseline valuation references.

In summary, Toll Brothers appears to have an established position in the luxury housing market but has had volatile financial performance. Growth prospects look positive based on analyst projections. The leveraged capital structure is noteworthy. More consistent execution and prudent capital allocation could further strengthen the company’s financial position.

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Chart of Key Per Share Metrics

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Chart of Absolute Metrics

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Earnings Call Multi-Year Analysis

Strong financial position and capital allocation

Toll Brothers maintains a strong balance sheet with ample liquidity, low debt levels, and a focus on improving return on equity through share buybacks and dividends. This financial discipline and commitment to returning capital to shareholders is positive for long-term investors.

Pricing power and margin resilience

Despite cost pressures from supply chain disruptions and labor shortages, Toll Brothers has demonstrated consistent pricing power, allowing them to raise prices and maintain strong gross margins in the 27-28% range. Their focus on protecting margins, even in a softening demand environment, is encouraging.

Disciplined land acquisition strategy

Toll Brothers takes a prudent approach to land acquisitions, with increased use of options rather than outright purchases. They are selective in deals, requiring higher return thresholds and more conservative underwriting assumptions. This disciplined land strategy reduces risk.

Product diversification and growth opportunities

The company has successfully diversified into more affordable luxury homes and active adult communities, expanding its addressable market. It also sees growth opportunities from favorable migration trends to Sunbelt and Mountain states where it is expanding its footprint.

Operational improvements and capital efficiency

Toll Brothers is focused on improving operational efficiency through initiatives like increasing spec home construction, optimizing floor plans, and reducing SG&A expenses. It is also taking steps to improve capital efficiency, such as joint ventures and a shift towards optioned land.

While acknowledging near-term uncertainty, Toll Brothers remains confident in the long-term housing market fundamentals driven by demographics and supply/demand dynamics. The company appears well-positioned to navigate market cycles through its strategic initiatives and financial strength.

Overall, Toll Brothers’ consistent execution, financial discipline, product diversification, and focus on operational improvements position it well for long-term success, even amid potential market volatility. The key will be the company’s ability to maintain its pricing power, margins, and return metrics through various housing cycles.

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Financial Statements Multi Year

Overall strong financial performance

Overall, Toll Brothers has demonstrated strong financial performance with solid revenue growth, profitability improvements, and healthy demand across most periods analyzed. However, there are signs of moderating demand and a declining backlog in the more recent quarters.

Robust backlog and visibility

Toll Brothers has a robust backlog, providing good visibility into future revenues. However, the backlog value has been decreasing year-over-year in recent periods.

Efficient operations and disciplined cost management

Toll Brothers has efficient operations with improving gross margins and disciplined cost management, including lower SG&A expenses as a percentage of revenues.

Strong liquidity and financial flexibility

Toll Brothers has a strong liquidity position with significant cash balances and available credit facilities, as well as a conservative debt-to-capitalization ratio, providing financial flexibility.

Diversified geographic presence

Toll Brothers has a diversified geographic presence across five operating segments, reducing concentration risk and allowing the company to capitalize on regional housing market dynamics.

Strategic investments for future growth

Toll Brothers has made strategic investments in land acquisition, joint ventures for land development, homebuilding, and rental properties, positioning the company for future growth opportunities.

Prudent inventory management

Toll Brothers has demonstrated prudent inventory management, with controlled land positions and moderate impairment charges recognized.

The housing industry is cyclical, with periods of strong demand followed by moderations. Toll Brothers requires careful monitoring of market conditions and adjustments to its strategy to navigate these cycles.

Overall, Toll Brothers appears to be executing well operationally and financially, maintaining a solid foundation for long-term growth while navigating the inherent cyclicality of the housing market. The company’s diversification, liquidity, and strategic investments position it well for value creation over the long run, although moderating demand in recent periods is a potential risk to monitor.

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Insider Trading Analysis

Long-Term Patterns

The CEO (Douglas C. Yearley Jr.) and CFO (Martin P. Connor) have been consistently exercising stock options and selling shares over the past few years. This suggests they may be taking some chips off the table, but still maintain significant ownership.

Several other top executives like Paul E. Shapiro, Carl B. Marbach, and Richard J. Braemer have also been actively selling shares, indicating potential confidence in the near-term outlook.

However, there have also been some large gift transfers of shares, particularly by the Chairman Robert I. Toll, suggesting he remains bullish on the long-term prospects of the company.

Short-Term Implications

The consistent selling by the CEO, CFO, and other executives could signal some near-term caution or profit-taking, which may create some volatility in the stock price.

However, the large insider gifts and continued significant ownership by the top executives suggest they still have confidence in the company’s long-term growth potential.

Overall, the insider trading patterns paint a mixed picture. Long-term investors may want to monitor the company’s fundamentals and management’s strategic vision, while short-term investors should be prepared for potential volatility driven by insider selling activity. The company’s ability to navigate the housing market and execute on its growth plans will be key factors for both long-term and short-term investors.

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Management Compensation Benchmark Analysis

Base Salary Portion of Total Compensation

The base salary portion of total compensation for the top executives at TOL is relatively low, averaging around 22.59% across all years and executives reported. This suggests that the compensation structure at TOL is more heavily weighted towards variable, performance-based components like stock awards and incentive plan compensation.

Comparison to Peer Companies

Comparing to the other homebuilder companies:

  • D.R. Horton, Inc. (DHI) has a lower average base salary portion of 15.91% of total compensation.
  • Lennar Corporation (LEN) has a higher average base salary portion of 16.46% of total compensation.
  • KB Home (KBH) has a higher average base salary portion of 19.95% of total compensation.
  • PulteGroup, Inc. (PHM) has a higher average base salary portion of 18.28% of total compensation.
  • Beazer Homes USA, Inc. (BZH) has a higher average base salary portion of 24.59% of total compensation.

Alignment with Shareholder Value Creation

The higher variable pay components like stock awards and incentive plan compensation at TOL suggest that the executive compensation is more closely aligned with creating long-term shareholder value, as these types of compensation are typically tied to the company’s financial and operational performance.

The relatively low base salary portion indicates that TOL’s executives have a significant portion of their total compensation at risk, which can incentivize them to focus on the company’s long-term success and growth.

Conclusion

In summary, the executive compensation structure at TOL appears to be more heavily weighted towards variable, performance-based components compared to some of its peers, which suggests a stronger alignment between executive pay and long-term shareholder value creation.

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Proxy Statement Analysis

Base Salary Levels

The base salary levels should be reasonable and not excessive. It is important to assess whether the base salaries are in line with industry peers and the company’s performance.

Short-Term Incentive Plan Metrics

The short-term incentive plan metrics should be tied to operational and financial metrics that drive sustainable growth. This ensures that executives are focused on delivering strong near-term results that contribute to long-term value creation.

Long-Term Equity Incentives

A significant portion of the total compensation should be tied to long-term stock or equity incentives to align the interests of executives with those of shareholders. This encourages executives to make decisions that prioritize long-term value creation.

Performance Metrics and Goals

The performance metrics and goals should be rigorous and aligned with the company’s strategic priorities for long-term value creation. This ensures that the incentive structure motivates executives to focus on the key drivers of the business.

Clawback/Recoupment Policies

The company should have clawback or recoupment policies in place, which allow for the recovery of compensation if there is misconduct or a restatement of financial results. This reinforces the pay-for-performance principle and holds executives accountable for their actions.

Stock Ownership Guidelines

The company should have stock ownership guidelines that require executives to maintain a meaningful equity ownership in the company. This further aligns the interests of executives with those of shareholders and encourages a long-term focus.

The analysis of the specifics of the compensation program design, metrics used, and alignment with long-term strategic goals would provide valuable insights for assessing whether the incentives are structured to motivate sustainable long-term performance and value growth for shareholders.

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News Analysis

Positive

Toll Brothers reported better-than-expected earnings and revenues for Q3 2023, beating analyst estimates. They also raised their full-year guidance.

Housing demand remains strong, with the company reporting a rise in new home orders and higher pricing. Their large backlog provides visibility.

They continue to open new luxury communities across multiple markets, expanding their geographic footprint.

The company increased its quarterly cash dividend by 5% in March 2023, signaling confidence in future cash flows.

Analysts have been positive on the stock, with some upgrading their ratings citing attractive valuations and the company’s ability to navigate the housing cycle.

Negative

Rising mortgage rates and affordability concerns could dampen housing demand going forward.

Supply chain issues and higher costs remain headwinds impacting profitability.

Economic uncertainty and potential recession fears may weigh on consumer confidence for big-ticket purchases like homes.

Overall, while facing some near-term headwinds, Toll Brothers seems well-positioned with its focus on the luxury segment, geographic diversification, pricing power and strong backlog. However, investors need to watch mortgage rates, costs and the overall economic environment closely. The company’s execution on managing growth while maintaining margins will be key for long-term value creation.

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Technical Indicators Analysis

Next Week Trading

The recent price action and technical indicators suggest a neutral to slightly bearish outlook for the next week. The TEMA is below the current price, indicating potential near-term downward pressure. The RSI is in the neutral range, not signaling overbought or oversold conditions. The short-term SMA_20 is also below the current price, further supporting a cautious near-term outlook.

Resistance and Support Levels

The key resistance levels appear to be around $122-$124, based on the recent price action and the SMA_50. The support levels are around $117-$119, where the SMA_20 and TEMA are currently situated. A break above $124 or below $117 could signal a more significant shift in the stock’s direction.

Short-Term Investor

For a short-term investor, the current technical picture suggests a wait-and-see approach. The neutral RSI and the TEMA below the current price indicate a lack of strong momentum, making it prudent to monitor the stock’s behavior around the identified support and resistance levels before taking a position.

Long-Term Investor

From a long-term perspective, the overall technical indicators appear relatively positive. The SMA_200 is above the current price, and the SMA_50 is above the SMA_20, indicating a favorable long-term trend. However, the recent pullback and the potential for near-term volatility suggest that a long-term investor may want to consider adding to their position gradually or wait for a more favorable entry point.

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Chart of Valuation History

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Financial Statements Annual

Financial Statements Annual 2024 Q2

Revenue and Profitability

Toll Brothers’ total revenue in fiscal 2023 was $9.99 billion, a 3% decrease from $10.28 billion in fiscal 2022. This was driven by a 9% decrease in home deliveries, partially offset by an 11% increase in average home prices.

Net income increased 7% to $1.37 billion in fiscal 2023 from $1.29 billion in fiscal 2022, driven by higher gross margins and lower selling, general and administrative expenses. The company’s operating income margin improved to 17.3% in fiscal 2023 from 14.7% in fiscal 2022.

Backlog and New Orders

The value of Toll Brothers’ backlog decreased 22% to $6.95 billion at the end of fiscal 2023 from $8.87 billion at the end of fiscal 2022, reflecting a 2% decrease in the number of homes in backlog.

The value of net new contracts signed decreased 13% to $7.91 billion in fiscal 2023 from $9.07 billion in fiscal 2022, due to a 2% decrease in the number of net contracts signed and an 11% decrease in the average value of each contract.

Land and Land Development

Toll Brothers controlled approximately 70,700 home sites at the end of fiscal 2023, a decrease from 76,000 home sites at the end of fiscal 2022, as the company forfeited control of over 4,000 lots during the year.

The company recognized $30.7 million in inventory impairment charges and writeoffs in fiscal 2023, compared to $32.7 million in fiscal 2022.

Investments and Joint Ventures

Toll Brothers had $959 million invested in various unconsolidated joint ventures at the end of fiscal 2023, up from $852 million at the end of fiscal 2022.

The company recognized $50.1 million in income from these unconsolidated entities in fiscal 2023, up from $23.7 million in fiscal 2022, primarily due to gains on property sales by the Rental Property Joint Ventures.

Balance Sheet and Liquidity

Toll Brothers had $1.30 billion in cash and cash equivalents and $179 million available under its $1.91 billion revolving credit facility at the end of fiscal 2023.

The company’s debt to total capitalization ratio was 0.30 to 1.00 at the end of fiscal 2023, down from 0.51 to 1.00 at the end of fiscal 2022.

Overall, Toll Brothers maintained strong profitability and liquidity in fiscal 2023, despite a moderation in housing demand and a decrease in new orders and backlog. The company’s diversification into rental properties and joint ventures has also contributed to its financial performance.

Financial Statements Annual 2023 Q2

Strong Financial Performance

Toll Brothers reported a 17% increase in total revenues to $10.28 billion in fiscal 2022 compared to $8.79 billion in fiscal 2021. Net income increased 54% to $1.29 billion in fiscal 2022 from $833.6 million in fiscal 2021. Earnings per share (diluted) increased to $10.90 in fiscal 2022 from $6.63 in fiscal 2021.

Robust Demand and Backlog

The value of net contracts signed decreased 21% to $90.67 billion in fiscal 2022 compared to $115.40 billion in fiscal 2021, reflecting a moderation in demand. Backlog value decreased 7% to $88.74 billion at the end of fiscal 2022 compared to $94.99 billion at the end of fiscal 2021.

Operational Efficiency

Home sales cost of revenues as a percentage of home sales revenues decreased to 74.5% in fiscal 2022 from 77.5% in fiscal 2021, driven by a shift in product mix, sales price increases, and lower interest costs. Selling, general and administrative expenses as a percentage of home sales revenues decreased to 10.1% in fiscal 2022 from 10.9% in fiscal 2021.

Liquidity and Capital Resources

Toll Brothers had $1.35 billion in cash and cash equivalents and $179 million available under its $1.91 billion revolving credit facility as of October 31, 2022. The company’s debt to total capitalization ratio was 0.36 to 1.00 at the end of fiscal 2022.

Acquisitions and Investments

Toll Brothers acquired the assets and operations of a homebuilder in San Antonio, Texas for $481 million in fiscal 2022. The company continued to invest in and expand its Toll Brothers Apartment Living and Toll Brothers Campus Living businesses, with $852.3 million in investments in unconsolidated entities as of October 31, 2022.

Overall, Toll Brothers demonstrated strong financial performance, maintained a healthy balance sheet, and continued to execute on its strategic initiatives to diversify its product offerings and geographic footprint.

Financial Statements Annual 2022 Q2

Strong Financial Performance in Fiscal 2021

Revenues increased 24% to $8.79 billion, driven by an 18% increase in home deliveries and a 3% increase in average home price. Net income increased 87% to $833.6 million, reflecting higher revenues and improved gross margins. The value of net contracts signed increased 44% to $1.15 billion, indicating strong demand. Backlog value increased 49% to $950 million, providing good visibility into future revenues.

Segment Performance

The Traditional Home Building segment saw revenue and income growth across all geographic regions, with the Mountain and Pacific regions performing particularly well. The City Living segment saw a significant increase in revenues and income, recovering from the impacts of COVID-19 in the prior year.

Liquidity and Capital Resources

The company had $1.64 billion in cash and cash equivalents and $181 million available under its revolving credit facility as of October 31, 2021. The company has manageable debt maturities, with the next significant maturity of $409 million in senior notes due in February 2022.

Inventory and Land Position

The company controlled 80,900 home sites as of October 31, 2021, a 28% increase from the prior year. The company recognized $26.5 million in inventory impairment charges during the year, down from $55.9 million in the prior year.

Investments in Unconsolidated Entities

The company has investments in various joint ventures, including land development, homebuilding, and rental property projects. The company recognized $740 million in income from these unconsolidated entities in fiscal 2021, a significant increase from $0.9 million in the prior year.

Overall, the financial statements demonstrate Toll Brothers’ strong operational and financial performance in fiscal 2021, with growth across its business segments, a healthy liquidity position, and strategic investments in land and joint ventures to support future growth.

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Financial Statements Quarterly

Financial Statements Quarterly 2024 Q2

Strong financial performance

The company reported solid revenue growth of 13% in the three-month period and 12% in the six-month period compared to the prior year. This was driven by a 6% increase in home deliveries and a 2% increase in average home prices.

Healthy profitability

The company’s net income increased 50% in the three-month period and 41% in the six-month period compared to the prior year. This was driven by higher revenues, improved gross margins, and disciplined cost management.

Robust demand

The value of net contracts signed increased 29% in the three-month period and 34% in the six-month period compared to the prior year, reflecting strong demand for the company’s homes. The backlog value remained healthy at $73.8 billion, though it decreased 12% year-over-year.

Efficient capital allocation

The company maintained a strong balance sheet with $1.03 billion in cash and $1.74 billion of available borrowing capacity under its revolving credit facility as of April 30, 2024. The debt-to-total capitalization ratio was a conservative 0.28.

Diversified geographic presence

The company operates in five geographic segments, providing exposure to different housing markets and reducing concentration risk. The MidAtlantic and South regions were particularly strong, with significant increases in revenue and profitability.

Prudent land acquisition and development

The company owned or controlled approximately 71,800 home sites as of April 30, 2024, providing a solid pipeline for future growth. The company also has commitments to acquire additional land from joint ventures, further strengthening its land position.

Investments in joint ventures

The company has investments in various joint ventures, which provide additional opportunities for land development, home building, and rental property operations. These investments contributed to the company’s overall performance, though the earnings can be volatile quarter-to-quarter.

Overall, the financial statements demonstrate the company’s ability to navigate the current market environment, maintain a strong financial position, and capitalize on favorable housing market trends. The diversified geographic presence, efficient capital allocation, and prudent land acquisition and development strategies position the company well for long-term growth and value creation.

Financial Statements Quarterly 2024 Q1

Strong Demand and Backlog

Net contracts signed increased 42% in value and 40% in units year-over-year, reflecting improved demand for new homes. Backlog value decreased 18% to $70.8 billion, but remained strong at 6,693 homes.

Revenue and Profitability Growth

Home sales revenue increased 10% year-over-year, driven by a 6% increase in home deliveries and a 5% increase in average delivered price. Gross profit margin improved to 27.7% from 25.6% in the prior year quarter, due to higher margins, lower interest expense, and lower impairment charges. Net income increased 25% to $239.6 million, with the effective tax rate declining to 23.0% from 24.5%.

Operational Efficiency

The company increased the number of selling communities to 377 at the end of Q1 2024, up from 370 at the end of fiscal 2023. Backlog conversion rate improved, contributing to the increase in home deliveries.

Balance Sheet and Liquidity

Cash and cash equivalents totaled $798.3 million at the end of Q1 2024, with $176 billion available under the $1.905 billion revolving credit facility. The debt-to-total capitalization ratio improved to 0.28 from 0.30 at the end of fiscal 2023.

Land and Joint Venture Investments

The company owned or controlled 70,400 home sites at the end of Q1 2024, down slightly from 70,700 at the end of fiscal 2023. Investments in and commitments to unconsolidated joint ventures totaled $995.8 million and $340.2 million, respectively, at the end of Q1 2024.

Overall, Toll Brothers demonstrated strong operational and financial performance in the first quarter of fiscal 2024, with solid demand, improved profitability, and a healthy balance sheet and liquidity position to support future growth.

Financial Statements Quarterly 2023 Q4

Strong financial performance

Toll Brothers reported solid revenue and earnings growth in the third quarter and first nine months of fiscal 2023 compared to the prior year periods. Home sales revenue increased 19% in Q3 and 13% in the first nine months, driven by higher average home prices and increased deliveries.

Improving demand

After a slowdown in the second half of 2022, Toll Brothers has seen a significant rebound in demand in 2023, with net contracts signed increasing 77% in units and 30% in value in Q3 compared to the prior year quarter. This reflects improved homebuyer sentiment and lower mortgage rates.

Healthy backlog

Despite the decline in net contracts, Toll Brothers’ backlog remains substantial at $787 million and 7,295 homes as of July 31, 2023, providing good visibility into future revenues.

Efficient operations

Toll Brothers has maintained strong profitability, with gross margins and operating margins improving year-over-year. The company has also effectively managed costs, with SG&A expenses declining as a percentage of home sales revenue.

Solid liquidity and balance sheet

Toll Brothers ended the quarter with $1.03 billion in cash and cash equivalents and $1.78 billion of available borrowing capacity under its revolving credit facility, providing ample financial flexibility. The company’s debt-to-capital ratio of 0.30 is conservative.

Diversified geographic presence

Toll Brothers operates across five geographic segments, providing exposure to different housing markets and reducing concentration risk. The company’s ability to adapt to changing regional dynamics is a key strength.

Investments in joint ventures

Toll Brothers has a significant portfolio of investments in land development, homebuilding, and rental property joint ventures, which provide additional growth opportunities and diversification.

Overall, Toll Brothers’ strong financial performance, improving demand, healthy backlog, efficient operations, solid liquidity, and diversified business model position the company well to navigate the evolving housing market and continue delivering value for long-term investors.

Financial Statements Quarterly 2023 Q3

Strong financial performance

Toll Brothers reported solid revenue and earnings growth in the three and six-month periods ended April 30, 2023 compared to the prior year periods. Home sales revenue increased 14% in the three-month period and 9% in the six-month period, driven by higher average delivered home prices.

Moderating demand

While net contracts signed remained strong, they declined 19% in units and 26% in value in the three-month period and 35% in units and 39% in value in the six-month period compared to the prior year periods. This reflects a moderation in housing demand from the very strong levels seen in the prior year.

Healthy backlog

Despite the decline in net contracts, Toll Brothers’ backlog remained healthy at $838 million (7,574 homes) at April 30, 2023, down 28% in value and 36% in units from the prior year period, but up from $887 million (8,098 homes) at October 31, 2022.

Solid liquidity and capital structure

Toll Brothers had $761 million in cash and cash equivalents and $179 million available under its $1.905 billion revolving credit facility as of April 30, 2023. The company’s debt to total capitalization ratio was a conservative 0.31 to 1.0, providing financial flexibility.

Disciplined cost management

Toll Brothers was able to improve its gross margins and reduce selling, general and administrative expenses as a percentage of home sales revenue in the three and six-month periods, demonstrating operational discipline.

Diversified geographic presence

Toll Brothers operates across five geographic segments, providing diversification and the ability to capitalize on regional housing market dynamics. The company’s performance varied across its segments, with the South and Pacific regions showing particular strength.

Investments in joint ventures

Toll Brothers has a significant portfolio of investments in joint ventures, which provide access to additional land and development opportunities, but also introduce some complexity and risk that should be monitored.

Overall, Toll Brothers appears to be navigating the current housing market environment well, maintaining a strong financial position and operational discipline, while also investing for long-term growth through its joint venture activities. The moderation in housing demand is a potential risk, but the company’s diversified business model and healthy backlog provide a solid foundation.

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Earnings Call Analysis

Earnings Call Analysis 2024 Q2

Strong Balance Sheet and Financial Flexibility

Toll Brothers has a strong balance sheet with ample liquidity, low net debt, and no significant near-term debt maturities. This provides financial flexibility.

Increased Spec Home Strategy

The company is focused on increasing its spec home strategy, which now represents 50% of orders and 40% of deliveries. This allows for faster delivery timelines and higher margins as customers can still personalize the homes.

Diversified Demand Across Markets and Product Types

Toll Brothers is seeing strong demand across its markets and product types, with particular strength in the Pacific region, Texas, and the affordable luxury segment. This diversification reduces risk.

Commitment to Shareholder Returns

The company is committed to returning capital to shareholders through share buybacks and dividends, which should drive higher returns on equity.

Disciplined Land Acquisition Strategy

Toll Brothers is selective in its land acquisitions, focusing on deals that meet its return thresholds. This disciplined approach has allowed the company to maintain strong gross margins around 27-28%.

Confidence in Sustainable Gross Margins

Management seems confident in the long-term sustainability of the current gross margin levels, driven by their land acquisition strategy, ability to offer design customization, and focus on higher-end markets.

Potential for Margin Normalization

The analyst questions suggest some caution around the potential for a normalization in gross margins, but Toll Brothers appears well-positioned to maintain its margins relative to peers.

Overall, Toll Brothers appears to be executing well on its strategic initiatives, maintaining a strong financial position, and focusing on driving higher returns for shareholders – key attributes for a long-term investor.

Earnings Call Analysis 2024 Q1

Strong Financial Performance Despite Challenging Market Conditions

Toll Brothers has demonstrated strong financial performance despite challenging market conditions, with record revenues, earnings, and ROE over the past two years as mortgage rates have doubled.

Diversified Product Offerings

The company has successfully executed a strategy of broadening its product offerings to include more affordable luxury and active adult homes, which now make up a significant portion of its sales mix. This has allowed it to capture a larger share of the market.

Focus on Capital Efficiency and Shareholder Returns

Toll Brothers is focused on capital efficiency, cash flow, and returning capital to shareholders through share repurchases and dividends. This has strengthened its balance sheet and improved its valuation metrics.

Optimism for the Spring Selling Season

The company is optimistic about the spring selling season, citing the recent decline in mortgage rates and its strategy of increasing spec home inventory to provide more immediate move-in ready options for buyers.

Prudent Land Acquisition Approach

While Toll Brothers is comfortable with its current mix of owned and optioned land, it may slow the pace of land banking due to higher costs of capital, instead focusing on purchase money mortgages to maintain capital efficiency.

Analyst Scrutiny on Inventory Management

Analysts are closely watching Toll Brothers’ ability to manage the transition to a higher percentage of spec homes and the impact on inventory turns, margins, and overall profitability.

Overall, Toll Brothers appears to have adapted well to the changing market conditions and is positioning itself for continued success through a focus on product diversification, operational efficiency, and prudent capital allocation.

Earnings Call Analysis 2023 Q4

Toll Brothers Maintains Disciplined, Margin-Focused Strategy

Toll Brothers is maintaining a disciplined, margin-focused strategy rather than chasing the bottom in a softening market. They did not aggressively offer incentives when demand slowed last year, and plan to take a similar approach if demand weakens again.

Operational Efficiency Improvements

The company is focused on improving operational efficiency, with headcount down 11% while the business is growing. This has driven strong SG&A performance and they see further opportunities to do more with less.

Affluent Buyer Profile

Toll Brothers’ buyers tend to be more affluent, with 25% paying all cash in the latest quarter, up from a long-term average of 20%. Buyers are also making higher down payments, with average LTV of 68%, suggesting they have the liquidity to absorb higher mortgage rates.

Existing Home Inventory as a Tailwind

The company sees the tight existing home inventory as a tailwind, as it creates a “lock-in effect” where existing homeowners are reluctant to give up their low mortgage rates. This benefits larger, well-capitalized builders like Toll Brothers.

Shift Towards Spec Home Construction

Toll Brothers is shifting towards more spec home construction, which now represents 40% of orders. This helps meet demand while also improving cycle times and construction efficiency.

Analyst Skepticism and Toll Brothers’ Commitment

The analyst questions suggest some skepticism around the sustainability of Toll Brothers’ strong performance, particularly if demand were to slow. However, the company appears committed to maintaining its disciplined, margin-focused approach.

Overall, Toll Brothers seems well-positioned with a strong balance sheet, operational improvements, and a customer base that is less rate-sensitive. The long-term investor should watch for the company’s ability to maintain margins and returns on equity in a potentially softer market environment.

Earnings Call Analysis 2023 Q3

Demand Resilience

Despite rising interest rates, Toll Brothers has not seen a significant drop in demand. In fact, May sales so far are trending better than historical seasonal declines, suggesting continued strong buyer interest.

Pricing Power

Toll Brothers has been able to increase prices by an average of $25,000 per home in the second quarter, a combination of base price increases and reduced incentives. This indicates the company’s ability to pass on higher costs to buyers.

Spec Home Strategy

Spec homes have been accounting for around 40% of Toll’s orders, helping to fill the gap left by tight resale inventory. This strategy appears to be working well for the company.

Land Acquisition Opportunities

Smaller private builders are facing pressure from tighter credit conditions, leading to more land acquisition and potential M&A opportunities for Toll Brothers to expand its footprint.

Margin Outlook

Gross margins are expected to moderate in the second half of the year as the company delivers homes sold during the weaker demand environment in 2022. However, lower lumber costs and reduced incentives should provide a tailwind going forward.

Capital Allocation

Toll Brothers remains committed to returning capital to shareholders through share repurchases and dividends, reflecting confidence in the business.

Overall, Toll Brothers appears to be navigating the current market environment well, leveraging its strong brand, operational efficiency, and strategic initiatives to drive continued performance. The company’s focus on land acquisition and capital allocation also suggest a prudent long-term approach.

Earnings Call Analysis 2023 Q2

Demand has improved significantly since January

Demand has improved significantly since January, with January orders exceeding November and December combined. This suggests a potential turnaround in the housing market.

Disciplined land acquisitions

Toll Brothers is being selective and disciplined in its land acquisitions, maintaining high underwriting standards with a focus on current market conditions rather than historical trends. This suggests a prudent approach to managing growth.

Improvements in supply chains and construction costs

The company is seeing improvements in supply chains and construction costs, which should help support margins going forward. However, they remain cautious and are not assuming significant cost declines in their guidance.

Reducing SG&A expenses

Toll Brothers is focused on reducing SG&A expenses through headcount reductions and other efficiency measures. This should help improve profitability, even in a challenging market environment.

Strong balance sheet and capital return

The company is maintaining a strong balance sheet, with plans to further reduce debt and return capital to shareholders through share repurchases. This financial discipline is positive for long-term investors.

Measured approach to growth and investment

While the company is encouraged by the recent demand improvement, they acknowledge the continued uncertainty around the broader economy and housing market. They are taking a measured approach to growth and investment.

Overall, the key insights suggest Toll Brothers is navigating a volatile market environment with prudence and discipline, which should benefit long-term investors. The company’s focus on cost control, balance sheet management, and selective growth appears well-aligned with the current market conditions.

Earnings Call Analysis 2023 Q1

Backlog and Guidance

Toll Brothers has a strong backlog of over 8,100 homes valued at $8.9 billion, providing good visibility into fiscal 2023 results. However, the company is cautious about the current demand environment and has built in some cushion in its 27% gross margin guidance for fiscal 2023.

Balancing Delivery and New Sales

The company is strategically balancing delivering its high-margin backlog in 2023 while also generating new sales for future deliveries. It is adjusting product offerings, pricing and incentives based on local market dynamics.

Land Acquisition Strategy

Toll Brothers is being selective on land acquisitions, walking away from or renegotiating deals that no longer meet its higher return thresholds. It expects to significantly reduce land spend in fiscal 2023.

Capital Allocation

The company plans to focus on debt reduction, share repurchases and opportunistic land acquisitions given its strong liquidity position of over $3 billion.

Housing Market Dynamics

While the company’s higher-end, wealthier buyers are less sensitive to mortgage rate changes, Toll Brothers acknowledges they are still impacted. The company is closely monitoring the spring selling season to gauge the depth and length of the current housing market downturn.

Outlook and Confidence

Toll Brothers is cautious in its near-term outlook, but remains confident in the long-term fundamentals of the housing market and its ability to navigate the current challenges.

Overall, the key is Toll Brothers’ focus on protecting its high-margin backlog, prudent capital allocation, and willingness to adjust strategy as market conditions evolve – all while maintaining a long-term perspective on the housing market.

Earnings Call Analysis 2022 Q4

Supply chain and production challenges

Toll Brothers is facing delays in getting final inspections and utility connections, especially in California, which has impacted their ability to deliver homes as planned. This seems to be an industry-wide issue.

Demand softening

Toll Brothers saw a significant decline in new orders (around 60% lower year-over-year) as buyers pulled back in the face of higher mortgage rates, home prices, and economic uncertainty. However, they are seeing some signs of improvement in recent weeks.

Pricing power and margins

Toll Brothers has been able to maintain strong pricing power and expand gross margins, with the backlog providing visibility into continued margin expansion in 2023. They are being more selective and disciplined on new land acquisitions.

Capital allocation

Toll Brothers is focused on return on equity, with continued share repurchases and debt reduction as priorities. They are also exploring more capital-efficient strategies like joint ventures for their City Living division.

Cautious optimism

While near-term uncertainty remains, Toll Brothers believes the long-term fundamentals supporting housing demand, like demographics and undersupply, remain intact. They are taking a disciplined approach, but are cautiously optimistic about the market settling into a more normal seasonal pattern.

Overall, Toll Brothers appears to be navigating the current market challenges well, leveraging its strong backlog and pricing power, while maintaining financial discipline. The key will be how they manage the evolving demand environment going forward.

Earnings Call Analysis 2022 Q3

Disciplined and Capital-Efficient Land Acquisition

Toll Brothers is maintaining a disciplined and capital-efficient land acquisition strategy, with more land being optioned rather than owned outright. This reduces risk and allows them to be more selective in new land deals.

Tightened Underwriting Criteria

The company has tightened its underwriting criteria for new land acquisitions, requiring higher gross margins and IRRs, higher contingencies for cost increases, and more conservative sales pace assumptions. This suggests they are being more cautious in their land purchases.

Improving Return on Equity

Toll Brothers is focused on improving its return on equity, evidenced by share repurchases, debt reduction, and dividend increases. This capital allocation strategy seems prudent for long-term shareholders.

Moderation in Buyer Sentiment

While demand remains strong overall, the company has noticed a moderation in buyer sentiment over the past month, particularly in their more affordable luxury communities. This suggests some sensitivity to rising mortgage rates and macroeconomic conditions.

Confidence in Inventory and Land Position

The analyst questions imply concern about potential housing market downside and land impairments, but Toll Brothers appears confident in its inventory and land position, noting significant margins and limited risk of writedowns.

Diversifying Business Model

The company’s shift towards more rental and single-family rental projects, in partnership with larger firms, suggests an effort to diversify its business model and capitalize on strong rental market trends.

Overall, Toll Brothers seems to be taking a prudent, disciplined approach to managing its business in the face of a potentially moderating housing market. The long-term investor should watch for continued execution on the company’s capital allocation priorities and its ability to navigate any softening in demand.

Earnings Call Analysis 2022 Q2

Demand Remains Strong

Despite rising interest rates, Toll Brothers is not seeing any significant impact on demand for their homes. Web traffic and foot traffic remain elevated, indicating continued strong buyer interest.

Pricing Power

Toll Brothers continues to raise prices across nearly all of their communities, demonstrating their ability to pass on cost increases to customers. The next home sold is expected to have the highest margin seen in the current cycle.

Supply Chain and Labor Challenges

Toll Brothers is facing ongoing supply chain disruptions and labor shortages, leading to extended construction timelines. They are taking steps to mitigate these issues, such as limiting sales, increasing spec starts, and optimizing floor plans and options.

Backlog Visibility

Toll Brothers’ record $10.8 billion backlog provides good visibility into future revenues, even as they focus on production over sales in the near term.

Capital Allocation

Toll Brothers is prioritizing investment in land and community growth, while also using excess cash to reduce leverage and return capital to shareholders through share repurchases and dividends.

Luxury Buyer Profile

Toll Brothers’ luxury buyers tend to have higher incomes, lower loan-to-value ratios, and are less sensitive to rising interest rates compared to entry-level buyers. This insulates them from affordability concerns.

Cautious Guidance

Despite the strong demand, Toll Brothers is maintaining a relatively wide range in their full-year guidance, reflecting the continued uncertainty around supply chain and labor constraints.

Overall, Toll Brothers appears well-positioned to navigate the current market environment, with a focus on production, pricing power, and a financially strong customer base. However, the company remains cautious about the potential impact of ongoing supply chain and labor challenges.

Earnings Call Analysis 2022 Q1

Strong Housing Market Fundamentals

Toll Brothers is benefiting from strong housing market fundamentals, including favorable demographics, pent-up demand, low mortgage rates, and a tight resale market. This is driving migration patterns to Sunbelt and Mountain States where Toll has expanded.

Focus on Growth, Profitability, and Capital Efficiency

Toll is focused on driving growth, increasing profitability, and improving capital efficiency. They have successfully pivoted to a more capital-efficient land strategy, with 55% of lots now optioned versus 43% a year ago.

Despite supply chain and labor constraints, Toll has been able to more than offset cost pressures with price increases. They are being prudent by not assuming any improvement in these conditions in their guidance.

Margin Expansion Projected

Toll expects to continue growing margins, with a 250 basis point increase in adjusted gross margin projected for fiscal 2022, driven by strong pricing in the backlog and operating efficiencies.

Strong Backlog and Demand

Toll’s backlog and demand remain very strong, with over 300 non-binding reservations per week in the first 5 weeks of fiscal Q1. However, cycle times have extended 6-8 weeks longer than a year ago due to supply chain and labor issues.

Conservative Guidance with Potential Upside

Toll is being conservative in its guidance, not assuming any improvement in the supply chain or labor markets. This suggests potential upside if conditions stabilize or improve.

Capital Allocation Strategy

Toll is focused on returning capital to shareholders through dividends and share buybacks, while also investing in growth through land acquisitions and development.

Overall, Toll Brothers appears well-positioned to capitalize on the strong housing market, though the company is being prudent in its approach given the ongoing supply chain and labor challenges.

Earnings Call Analysis 2021 Q4

Pricing Power and Margins

Toll Brothers is seeing strong pricing power, allowing them to raise prices significantly and expand margins. The company expects gross margins to “significantly exceed” 25.6% in fiscal 2022, driven by higher prices in the backlog.

Capital Efficiency Initiatives

Toll Brothers is focused on improving capital efficiency through strategies like increasing the percentage of optioned land versus owned land. This is expected to drive a sustainable increase in return on equity (ROE) above 20% long-term.

Diversification and Expansion

The company is expanding into new markets, product lines, and price points, including an increased focus on affordable luxury homes. This diversification is contributing to improved margins and growth.

Strategic Partnership with Equity Residential

The new joint venture with Equity Residential to develop rental apartment communities is a capital-efficient way for Toll Brothers to grow its apartment business.

Cautious on Near-Term Demand

While demand remains strong overall, the company is seeing some seasonal softening in certain Northeast and Midwest markets. However, they still expect a very strong housing market going forward.

Potential Policy Support

Proposed legislation in Washington, such as first-time buyer tax credits, could further stimulate housing demand, which Toll Brothers would likely benefit from.

Overall, the key insights point to Toll Brothers’ focus on improving capital efficiency, diversifying its business, and capitalizing on strong housing market fundamentals – all of which suggest a positive long-term outlook for the company.

Earnings Call Analysis 2021 Q3

Demand remains very strong

Toll Brothers is seeing record backlog and contracts. They are strategically moderating sales pace by limiting monthly lot releases and using allocation/sealed bid processes to maximize pricing and margins.

Focus on capital efficiency and improving return on equity (ROE)

Toll Brothers is increasing the percentage of optioned vs. owned land, expanding into more affordable luxury homes, and returning capital to shareholders through buybacks and dividends.

Confident in managing cost pressures

Toll Brothers is confident in their ability to manage cost pressures, such as rising material and labor costs, through price increases. They have contracts in place for components and trades, and prioritize protecting margins on homes in backlog.

Significant growth opportunities

Toll Brothers sees significant growth opportunities, with plans to expand community count by 10% in fiscal 2022. They are benefiting from migration trends, with 40-50% of buyers coming from out-of-state in some markets.

Optimizing construction processes

Toll Brothers is optimizing construction processes, especially in their affordable luxury segment, and applying those learnings across their product lines to improve efficiency and cycle times.

Expectations for 2022

While not providing formal 2022 guidance, Toll Brothers expects gross margins and ROE to significantly exceed 2021 levels, with ROE expected to exceed 20% in 2022.

The analyst questions and management responses suggest Toll Brothers is well-positioned to capitalize on the strong housing market through disciplined land acquisition, operational improvements, and strategic capital allocation – key factors for a long-term investor to consider.

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The information provided on this blog is for informational purposes only and should not be considered as financial advice. You should consult with a qualified financial professional before making any investment decisions. Past performance is not indicative of future results. Investing involves risk, including the potential loss of principal.