Toll Brothers Inc TOL reported second-quarter results that were ahead of expectations in almost every way — but its guidance disappointed on all metrics that matter, according to Wells Fargo.
The Analyst
Stephen East maintained an Outperform rating on Toll Brothers with an unchanged $45 price target.
The Thesis
The home construction company’s quarterly EPS was 97 cents excluding an impairment charge of around 10 cents, East said in a Tuesday note. (See his track record here.)
The figure beat the Wells Fargo estimate of 80 cents and the consensus of 75 cents, he said.
Toll Brothers exceeded expectations on all important parameters, including revenue, gross margin, SG&A and income, the analyst said.
Order dollars declined by a massive 16 percent vs. the Wells Fargo estimate of a 9-percent downturn. Order units were down 9.1 percent, slightly better than the consensus expectation of an 8.7 percent decline.
The homebuilder's third-quarter guidance implies misses in all important metrics, from revenue to the operating margin, East said.
"The question becomes how much do we accept management's guidance?" East said. "Givent his quarter's easy beat of each guided item, the initial forecasting tendency is to go above guide."
The lower volumes and mix shift away from California could lend upside to the guidance, he said.
“The GM likely has less wiggle room, given last year’s discounting is now rolling through,” the analyst said. Toll Brothers could continue share buybacks, despite the recently announced acquisition of Sharp Residential, he said.
The acquisition makes sense, East said.
“We like the lower risk bolt-on and like investment in the Southeast. Sharp’s product looks like a fit and the Atlanta submarkets are as well.”
Price Action
Shares of Toll Brothers had nosedived almost 4 percent to trade at $36.96 at the time of publishing on Wednesday morning.
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