Homebuilding company Toll Brothers (NYSE:TOL) reported revenue ahead of Wall Street’s expectations in Q3 CY2024, with sales up 10.4% year on year to $3.33 billion. Its non-GAAP profit of $4.63 per share was 6.6% above analysts’ consensus estimates.

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Douglas C. Yearley, Jr., chairman and chief executive officer, stated: “I am very pleased with our fourth quarter results, which cap the strongest year ever for Toll Brothers. For the full year, we generated a record $10.6 billion of home sales revenue, earned $15.01 per diluted share and grew contracts by 27% in both units and dollars. In the fourth quarter, we delivered 3,431 homes and generated $3.3 billion in home sales revenues, up 25% in units and 10% in dollars compared to last year’s fourth quarter. Our fourth quarter adjusted gross margin was 27.9%, beating guidance by 40 basis points, and our SG&A expense was 8.3% of home sales revenues, or 30 basis points better than guidance. Our strong margin performance and better than projected home sales revenues drove earnings of $4.63 per diluted share in the quarter, up 13% compared to last year. We also signed 2,658 net contracts at an average price of $1,000,000, up 30% in units and 32% in dollars compared to last year’s fourth quarter. Our performance this year and in the fourth quarter demonstrates the power of our luxury brand, the financial strength of our buyers, and the success of our strategies of increasing our spec home production and widening our geographies, price points and product lines.

Company Overview

Started by two brothers who started by building and selling just one home in Pennsylvania, today Toll Brothers (NYSE:TOL) is a luxury homebuilder across the United States.

Home Builders

Traditionally, homebuilders have built competitive advantages with economies of scale that lead to advantaged purchasing and brand recognition among consumers. Aesthetic trends have always been important in the space, but more recently, energy efficiency and conservation are driving innovation. However, these companies are still at the whim of the macro, specifically interest rates that heavily impact new and existing home sales. In fact, homebuilders are one of the most cyclical subsectors within industrials.

Sales Growth

Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Thankfully, Toll Brothers’s 8.7% annualized revenue growth over the last five years was decent. Its growth was slightly above the average industrials company and shows its offerings resonate with customers.

Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Toll Brothers’s recent history shows its demand slowed as its annualized revenue growth of 2.7% over the last two years is below its five-year trend.

This quarter, Toll Brothers reported year-on-year revenue growth of 10.4%, and its $3.33 billion of revenue exceeded Wall Street’s estimates by 5.2%.

Looking ahead, sell-side analysts expect revenue to remain flat over the next 12 months, a deceleration versus the last two years. This projection is underwhelming and indicates its products and services will see some demand headwinds.

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Operating Margin

Toll Brothers has been an optimally-run company over the last five years. It was one of the more profitable businesses in the industrials sector, boasting an average operating margin of 15%. This result was particularly impressive because of its low gross margin, which is mostly a factor of what it sells and takes huge shifts to move meaningfully. Companies have more control over their operating margins, and it’s a show of well-managed operations if they’re high when gross margins are low.

Analyzing the trend in its profitability, Toll Brothers’s operating margin rose by 10.6 percentage points over the last five years, as its sales growth gave it immense operating leverage.

In Q3, Toll Brothers generated an operating profit margin of 18.3%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

Earnings Per Share

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Toll Brothers’s EPS grew at an astounding 30.5% compounded annual growth rate over the last five years, higher than its 8.7% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

Diving into Toll Brothers’s quality of earnings can give us a better understanding of its performance. As we mentioned earlier, Toll Brothers’s operating margin was flat this quarter but expanded by 10.6 percentage points over the last five years. On top of that, its share count shrank by 28.5%. These are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.

Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.

In Q3, Toll Brothers reported EPS at $4.63, up from $4.11 in the same quarter last year. This print beat analysts’ estimates by 6.6%. Over the next 12 months, Wall Street expects Toll Brothers’s full-year EPS of $15.27 to shrink by 3.8%.

Key Takeaways from Toll Brothers’s Q3 Results

We were impressed by how significantly Toll Brothers blew past analysts’ revenue expectations this quarter. We were also happy its EPS outperformed Wall Street’s estimates. The company also initiated fiscal 2025 guidance with unit deliveries and average price of these homes roughly in line with expectations. Perhaps due to the convincing beats in the quarter, the market expected better guidance. Shares traded down 2.9% to $152 immediately following the results.

So do we think Toll Brothers is an attractive buy at the current price? We think that the latest quarter is only one piece of the longer-term business quality puzzle. Quality, when combined with valuation, can help determine if the stock is a buy. We cover that in our actionable full research report which you can read here, it’s free.