Homebuilder Toll Brothers (click ticker for report: ) posted fantastic third quarter results Wednesday morning. Revenue surged 40% year-over-year to $554 million, which was even stronger than the Street expected. Earnings grew an incredible 43% year-over-year to $0.36 per share, double the consensus estimate. The firm anticipates fiscal year 2012 revenue from homes to be in the range of $1.71 billion to $1.84 billion, up about 16% from the same period a year ago.
Without a question, the new housing market is booming. CEO Douglas Yearly remarked:
We are enjoying the most sustained demand we’ve experienced in over five years. In the past three quarters, the values of our signed contracts were up 45%, 51% and now 66% compared to FY 2011.
Yearly also noted that due to the firm’s strong capital position, it is facing limited competition from smaller private builders who lack the same amount of access to reasonably priced capital.
Toll Brothers is firing on all cylinders, as the backlog grew 59% year-over-year to 2,559 units. Approximately 44 percentage points of the growth was the result of unit increases, meaning the firm also experienced substantial pricing gains. The firm managed its cost structure much better during the third quarter of its 2012 fiscal year, as gross margins expanded 100 basis points to 24.4% and SG&A expenses declined 290 basis points to 13.5% of revenue. We’ve previously noted why we think new home sales are, and will continue to be, stronger than existing home sales. Toll Brothers results support this outlook.
Interestingly enough, management had some interesting commentary on the interconnectedness of housing and the broader economy. Robert Toll, chairman of the board, stated:
In most markets, complex land entitlement processes make it difficult to quickly get land approved and new homes into production. Therefore, after almost every recession, this supply-demand imbalance has led to significant home price increases, as accelerating customer appetite bumps up against very minimal inventory supply. These rising home prices have caused many homeowners to once again feel more comfortable with their (respective) net worth, which in turn, has helped fuel the economy’s further expansion.
We think Toll is implying that new housing sales are a leading indicator of economic expansion, so perhaps the concerns about Europe are overshadowing a US economy that could be on the brink of renewed growth.
Though we very much liked Toll Brothers’ quarter, we think shares are a bit rich at current levels. The firm’s technicals are bullish, leading to a score of 6 on the Valuentum Buying Index, but we don’t add shares to our Best Ideas Newsletter portfolio when their price exceeds our fair value estimate range. Nevertheless, the US housing market is back.