Why Toll Brothers Inc Stock Dropped 10% This Morning

12/6/17

By Rich Smith, MotleyFool

What happened

Shares of luxury-home builder Toll Brothers Inc (NYSE:TOL) dropped more than 10% in early Tuesday trading, before retracing to about a 5.1% loss as of 11:15 a.m. EST. The reason, as you might have guessed, is earnings.

This morning, Toll Brothers reported its fiscal fourth-quarter and full-year 2017 earnings numbers. For the quarter, Toll Brothers earned $1.17 per share, $0.02 shy of Wall Street's expected $1.19. Sales for the quarter -- $2.03 billion -- likewise fell short of expectations for $2.05 billion in sales.

Home frame atop concrete foundation

DON'T LET ONE QUARTER'S DISAPPOINTMENT SCARE YOU AWAY -- TOLL BROTHERS STOCK HAS A FIRM FOUNDATION. IMAGE SOURCE: GETTY IMAGES.

So what

So much for the quarter. Now let's take a step back and get the big picture-window view on how this homebuilder did for the fiscal year as a whole. In fiscal 2017, Toll Brothers earned $3.17 per diluted share. This was a 45% year-over-year improvement over the $2.18 per diluted share the company earned in fiscal 2016.

Sales for the year -- $5.82 billion -- grew 12% year over year. Homebuilding deliveries climbed 17% to 7,151 units. Thus, it appears that the average selling price of homes built by Toll Brothers declined somewhat in fiscal 2017 versus 2016.

Now what

Nonetheless, Toll Brothers grew nicely in 2017, and growth is good. What's more, 2018 looks to be another good growth year for Toll Brothers stock. Toll Brothers told investors that in the new fiscal year, they can expect to see the company:

  • deliver between 7,700 and 8,700 units over the course of the year -- 15% growth at the midpoint;
  • collect revenue of between $810,000 and $860,000 per unit delivered;
  • and earn approximately 24% gross margins on these revenues -- a 250-basis-point improvement over 2017's performance.

My back-of-the-napkin calculations suggest Toll Brothers is looking at about $6.8 billion in revenue in 2018 -- slightly better than what Wall Street was expecting -- and better profits to boot. In view of this estimate, I'm not sure just what it is that investors are so upset about with Toll Brothers. In light of Toll Brothers' strong and ongoing performance, a small earnings miss on a single quarter's numbers doesn't seem to justify the size of today's sell-off.

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