Toll Brothers Q3 earnings preview: Weak demand likely to weigh on sales

Toll Brothers (NYSE: TOL) disappointed investors in March when it issued weak guidance while reporting above-consensus results for the second quarter. The luxury homebuilder is preparing to publish the Third-quarter numbers Tuesday at 4:30 PM ET. On average, analysts expect earnings of $0.82 per share for the July quarter, which is down 35% from last year.

Revenues are seen falling 11% annually to $1.7 billion. The company has an impressive track record of beating expectations, which adds to the chances of a beat this time. It is estimated that deliveries of the Horsham, Pennsylvania-based company were impacted by the general weakness in the housing market.

Outlook

The management in its outlook predicted a sequential decline in deliveries and the average selling price, reflecting the seasonal dip in demand, especially during spring. The outlook, which is below analysts’ forecast, is in line with government data showing a dip in homebuilding activity during the three months ended July. Also, margins will likely come under pressure from high incentives.

Mixed Sentiment

The projection is in contrast to the macroeconomic backdrop that is considered favorable for homebuilders, such as the upbeat job market and low interest rates. Toll Brothers expanded its geographical footprint this year, entering new markets through strategic deals. This, combined with the revamped product line, will help the company counter the market headwinds to some extent.

Q2 Outcome

Looking back, there was a 7% annual growth in revenues in the second quarter, which resulted in a double-digit increase in earnings to $0.87 per share. The value of net signed contracts was down 16%. The results also went past the market’s prediction.

From an investment perspective, Toll Brothers may not be a promising bet as any strain on its cash flow, due to low sales, could weaken the balance sheet. The company has a high debt of about $3.6 billion.

Related: Toll Brothers Q2 2019 Earnings Conference Call Transcript

Despite the volatilities, shares of Toll Brothers remained stable over the last 52-week period. They moved up 5% since the beginning of 2019 but underperformed the real estate index of the S&P 500.

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