Toll Brothers, Inc. TOL is scheduled to report first-quarter fiscal 2025 (ended Jan. 31, 2025) results on Feb. 18, after the closing bell.
Find the latest earnings estimates and surprises on Zacks Earnings Calendar.
In the last reported quarter, Toll Brothers’ earnings per share (EPS) and revenues surpassed the Zacks Consensus Estimate by 7.7% and 5.3% and increased 12.7% and 10.4% on a year-over-year basis, respectively. Notably, quarterly performance was highlighted by the record home sales revenue and significant growth in contracts. TOL's adjusted gross margin was 27.9% in the fiscal fourth quarter, 40 basis points (bps) above guidance, with SG&A expenses at 8.3% of sales, 30 bps better than expected.
This luxury homebuilder has quite an impressive track record of surpassing earnings expectations, exceeding the consensus mark in three of the last four quarters and missed on one occasion. The average surprise over this period is 6.6%, as shown in the chart below.
Image Source: Zacks Investment Research
How Are Estimates Placed for TOL?
The Zacks Consensus Estimate for the fiscal first-quarter EPS has decreased to $1.99 from $2.11 over the past 60 days. The estimated figure indicates an 11.6% decline from the year-ago reported figure. The consensus mark for revenues is $1.9 billion, indicating a 2.6% year-over-year decrease.
Image Source: Zacks Investment Research
What the Zacks Model Unveils for Toll Brothers
Our proven model does not predict an earnings beat for Toll Brothers for the quarter to be reported. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. This is not the case here, as you will see below.
Earnings ESP: TOL has an Earnings ESP of 0.00%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Zacks Rank: The company currently carries a Zacks Rank #4 (Sell).
You can see the complete list of today’s Zacks #1 Rank stocks here.
Factors Influencing Toll Brothers’ Q1 Performance
Toll Brothers’ fiscal first-quarter home sales are expected to have decreased from the year-ago reported level, given lower average selling prices (ASPs). The affordability issue is a pressing concern owing to the higher mortgage rates scenario. Certain markets, such as Austin, San Antonio, Phoenix, and parts of Florida, had experienced softness in the prior quarter due to affordability concerns. While overall demand remained strong, these pockets of weakness will likely have an impact on the company’s quarterly performance.
Nonetheless, demographics play a crucial role in driving demand, with millennials entering the market later in life—often with higher incomes and greater accumulated wealth—and baby boomers seeking new homes as they transition into retirement. These factors, combined with limited resale inventory and an aging housing stock, continue to bolster demand for Toll Brothers' new homes.
To address affordability concerns, Toll Brothers strategically targets a more affluent segment of the market. Notably, in the fiscal fourth quarter, 28% of buyers paid in full with cash, minimizing exposure to rising interest rates. Among those who financed their homes, the average loan-to-value ratio stood at 69%, reflecting substantial equity contributions and financial stability. Additionally, the company's low cancelation rate of just 2.5% (as a percentage of backlog) underscores strong buyer commitment.
Toll Brothers expects fiscal first-quarter home deliveries of 1,900-2,100 units (indicating growth at the midpoint from 1,927 units delivered in the prior-year quarter) at an average price of $925,000-$945,000 (suggesting a decline from $1,002,600 a year ago).
Again, incentives have been a double-edged sword for Toll Brothers. While they played a key role in driving order growth and maintaining sales momentum, particularly in a challenging environment marked by rising mortgage rates and economic uncertainty, they also posed a drag on profitability and gross margins. Looking forward to fiscal 2025, the lingering effects of these incentives are expected to impact the fiscal first quarter’s adjusted gross margin, projected at 26.25% (implying a decline from 27.6% in the year-ago period), representing a low point for the year. Along with high incentives, higher land, labor and raw material costs are expected to put pressure on the fiscal first-quarter margins.
SG&A expenses are estimated to be 12.7% of home sales revenues, up from 11.9% in the year-ago period. The company expects the effective tax rate to be 22%.
Our Estimates
Our model predicts home sales revenues to decline 2% year over year to $1.89 billion, driven by a 6.3% lower ASP to $939,243 in the quarter. We expect deliveries to be up 4.6% year over year to 2,015 units.
We expect net signed contracts to be around 2,448 units, indicating an improvement of 19.9% from the prior-year reported figure.
Our model predicts a backlog of 6,428 units, indicating a decline of 4% from the year-ago period. The same for the backlog (in values) is pegged at $7.04 billion, implying a decline of 0.6% from the $7.08 billion in the year-ago period.
TOL Stock’s Price Performance & Valuation
Toll Brothers stock has exhibited a downward movement in the past three-month period but outperformed the Zacks Building Products - Home Builders industry.
TOL’s 3-Month Price Performance
Image Source: Zacks Investment Research
Let’s evaluate the value TOL provides to investors at its current price levels.
Currently, TOL is trading slightly at a discount compared to the industry average, as illustrated in the chart below.
It is also trading at a discount compared with big industry players like D.R. Horton, Inc. DHI, Lennar Corporation LEN and NVR, Inc. NVR. DHI, LEN and NVR have forward 12-month P/E multiples of 9.42, 9.28, and 14.1, respectively.
Presently, TOL holds a Value Score of A.
Image Source: Zacks Investment Research
Again, TOL’s trailing 12-month return on equity is better than its industry average, as shown in the chart below.
Image Source: Zacks Investment Research
An Update on Latest Mortgage Rates
The 30-year fixed-rate mortgage dropped for the week that ended Feb. 6, 2025, averaging 6.89%. The average rate fell from 6.95% recorded in the prior week. Over the past month, rates have remained steady, while economic data suggests continued stability. Although rates are higher than a year ago, purchase applications over the last two weeks have slightly exceeded last year's levels, signaling some underlying demand in the market.
Investment Thoughts: Buy, Sell or Hold TOL Stock?
Toll Brothers presents a solid long-term investment case supported by favorable demographics, strong buyer commitment, and a strategic focus on the affluent homebuyer segment. However, in the near term, multiple headwinds make the stock a less attractive investment at this time.
Despite efforts to mitigate affordability challenges, rising labor and material costs, a higher mix of spec homes (which carry lower margins), and the use of sales incentives are pressuring profitability. Additionally, the Federal Reserve’s cautious stance on rate cuts, coupled with economic uncertainties related to trade policies, could dampen demand momentum.
Furthermore, the stock has shown weakness over the past three months, and analyst estimates for earnings and revenue have been revised downward, reflecting expectations of near-term financial softness. While TOL is trading at a discount relative to peers, valuation alone is not enough to justify a bullish stance given the margin pressures and declining earnings outlook. Given these factors, now appears to be an opportune time for investors to sell TOL stock.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
