Toll Brothers (NYSE:TOL) Reports Q2 In Line With Expectations

Homebuilding company Toll Brothers (NYSE:TOL) reported results in line with analysts’ expectations in Q2 CY2024, with revenue up 1.5% year on year to $2.73 billion. It made a GAAP profit of $3.60 per share, down from its profit of $3.73 per share in the same quarter last year.

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Douglas C. Yearley, Jr., Chairman and Chief Executive Officer, stated, “We are very pleased to report another quarter of strong results. In our third quarter, we delivered 2,814 homes at an average price of $968,000, generating record third quarter home sales revenue of $2.72 billion. Our adjusted gross margin, at 28.8% in the quarter, significantly exceeded guidance due to favorable mix and greater efficiencies in our home building operations, and our SG&A margin of 9.0% beat guidance by 20 basis points. This combination of revenue and margin outperformance drove earnings of $3.60 per diluted share in the quarter."

Started by two brothers who started by building and selling just one home in Pennsylvania, today Toll Brothers (NYSE:TOL) is a luxury homebuilder across the United States.

Home Builders

Traditionally, homebuilders have built competitive advantages with economies of scale that lead to advantaged purchasing and brand recognition among consumers. Aesthetic trends have always been important in the space, but more recently, energy efficiency and conservation are driving innovation. However, these companies are still at the whim of the macro, specifically interest rates that heavily impact new and existing home sales. In fact, homebuilders are one of the most cyclical subsectors within industrials.

Sales Growth

A company’s long-term performance can give signals about its business quality. Even a bad business can shine for one or two quarters, but a top-tier one tends to grow for years. Luckily, Toll Brothers’s sales grew at a solid 9.8% compounded annual growth rate over the last five years. This shows it was successful in expanding, a good starting point for our analysis.

We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Toll Brothers’s recent history shows its demand slowed as its annualized revenue growth of 4.7% over the last two years is below its five-year trend.

This quarter, Toll Brothers grew its revenue by 1.5% year on year, and its $2.73 billion of revenue was in line with Wall Street’s estimates. Looking ahead, Wall Street expects revenue to remain flat over the next 12 months, a deceleration from this quarter.

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Operating Margin

Toll Brothers has been an optimally-run company over the last five years. It was one of the more profitable businesses in the industrials sector, boasting an average operating margin of 14.5%. This result was particularly impressive because of its low gross margin, which is mostly a factor of what it sells and takes huge shifts to move meaningfully. Companies have more control over their operating margins, and it’s a show of well-managed operations if they’re high when gross margins are low.

Looking at the trend in its profitability, Toll Brothers’s annual operating margin rose by 11.5 percentage points over the last five years, as its sales growth gave it immense operating leverage.

This quarter, Toll Brothers generated an operating profit margin of 18.2%, down 1.1 percentage points year on year. Since Toll Brothers’s operating margin decreased more than its gross margin, we can assume the company was recently less efficient because expenses such as sales, marketing, R&D, and administrative overhead increased.

EPS

Analyzing long-term revenue trends tells us about a company’s historical growth, but the long-term change in its earnings per share (EPS) points to the profitability of that growth–for example, a company could inflate its sales through excessive spending on advertising and promotions.

Toll Brothers’s EPS grew at an astounding 34.2% compounded annual growth rate over the last five years, higher than its 9.8% annualized revenue growth. This tells us the company became more profitable as it expanded.

We can take a deeper look into Toll Brothers’s earnings to better understand the drivers of its performance. As we mentioned earlier, Toll Brothers’s operating margin declined this quarter but expanded by 11.5 percentage points over the last five years. Its share count also shrank by 28.9%, and these factors together are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.

Like with revenue, we also analyze EPS over a more recent period because it can give insight into an emerging theme or development for the business. For Toll Brothers, its two-year annual EPS growth of 30.9% was lower than its five-year trend. We still think its growth was good and hope it can accelerate in the future.

In Q2, Toll Brothers reported EPS at $3.60, down from $3.73 in the same quarter last year. Despite falling year on year, this print beat analysts’ estimates by 8.2%. Over the next 12 months, Wall Street expects Toll Brothers to perform poorly. Analysts are projecting its EPS of $14.51 in the last year to shrink by 6.2% to $13.61.

Key Takeaways from Toll Brothers’s Q2 Results

It was good to see Toll Brothers beat analysts’ EPS expectations this quarter. We were also glad its full-year EPS guidance exceeded Wall Street’s estimates. Overall, this quarter had some key positives. The stock traded up 1.6% to $135.62 immediately after reporting.

Toll Brothers may have had a good quarter, but does that mean you should invest right now? When making that decision, it’s important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it’s free.