Can Toll Brothers (TOL) Surprise this Earnings Season?

Toll Brothers Inc. (TOL) is set to report fourth-quarter and fiscal 2014 results on Dec 10, after the market closes. Last quarter, the homebuilding company posted a positive surprise of 15.22%. Let’s see how things are shaping up for this announcement.

Factors to Consider this Quarter

On Nov 10, 2014, Toll Brothers released impressive preliminary fourth quarter and fiscal 2014 figures for orders, backlog and homebuilding revenues.

Toll Brothers reported preliminary revenues of $1.35 billion in the fourth quarter of fiscal 2014, up by 29% year over year on the back of aggressive pricing and an increase in the number of homes closed. The Zacks Consensus Estimate for the quarter stands at $1.32 billion.

The number of consolidated homebuilding deliveries increased to 1,807 units in the fourth quarter of fiscal 2014, up 22% year over year. The preliminary number of homes closed was within the company’s expectation of 1710 and 1910 homes. The preliminary average price of homes delivered was $747,000 in the quarter, up 6.3% year over year. The company witnessed an increase in homes delivered in all the operating regions.

The number of net orders signed was 1,282 units in the fourth quarter of fiscal 2014, up 10% year over year. Value of net orders signed during the quarter was $970.2 million, up 16% year over year. The average price of order was $757,000 in the quarter, up 5% year over year.

Orders rebounded in the fourth quarter after slowing down in the past 2 - 3 quarters of 2014 due to leveling of housing demand. The company witnessed improvement in orders and value in all the regions, apart from the North region.

Fiscal 2014

Reporting toward the higher end of the expected range of $3.76 billion and $3.99 billion, preliminary revenues of $3.91 billion in fiscal 2014 were up 46% year over year on the back of a 29% increase in number of homes closed. The Zacks Consensus Estimate stands at $3.87 billion.

The company had provided a detailed outlook for fiscal 2014 during the third quarter earnings conference. Management expects to deliver 5,300 and 5,500 homes in fiscal 2014. The average price of homes delivered is expected to range between $710,000 and $725,000. The company expects fiscal 2014 gross margin to improve 185 and 200 basis points year over year.

Earnings Whisper?

Our proven model does not conclusively show that Toll Brothers is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank of #1, 2 or 3 for this to happen. That is not the case here, as you will see below.

Zacks ESP: The Earnings ESP is 0.00% as both the Most Accurate Estimate and the Zacks Consensus Estimate stand at 72 cents.

Zacks Rank #3 (Hold). Though Zacks Ranks #1, 2 or 3 increase the predictive power of ESP, Toll Brothers’ ESP of 0.00% makes surprise prediction difficult.

We caution against stocks with Zacks Ranks #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

Other Stocks to Consider

Here are some other companies in the homebuilding and related sector that can be considered as our model shows that they have the right combination of elements to post an earnings beat this quarter:

Beazer Homes USA Inc. (BZH), Earnings ESP of +64.71% and a Zacks Rank #3 (Hold).

Headwaters Incorporated (HW), has an Earnings ESP of +40.00% and a Zacks Rank #3

NCI Building Systems Inc. (NCS), Earnings ESP of +5.88% and a Zacks Rank #3.

Read the Full Research Report on NCS
Read the Full Research Report on TOL
Read the Full Research Report on BZH
Read the Full Research Report on HW


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