Toll Brothers stock jumps as results top estimates despite housing market woes

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Toll Brothers (TOL) reported a sharp decline in demand for its homes and a spike in canceled deals in its most recent quarter as higher interest rates weigh on the housing market.

Still, the luxury homebuilder posted quarterly results that exceeded Wall Street expectations, with earnings per share coming at $5.63 against $3.96 expected by Wall Street analysts, according to data from S&P Capital IQ.

Revenue in the quarter totaled $3.71 billion in Q4, more than the $3.21 billion expected by analysts. Toll Brothers booked home sales revenue of $3.58 billion on 3,756 homes delivered in the fourth quarter. The company had forecasted Q4 deliveries of 3,250 to 3,550 homes.

Shares of Toll Brothers rose more than 7% on Wednesday following these results.

Toll Brothers said new contracts fell 60% from the same period last year to 1,186 in its fiscal fourth quarter, with the dollar value of new orders declining 56% from a year earlier.

Contracts canceled hit 20.8% of new deals in the period, the highest since 2009. Cancellations totaled 2.9% of the company’s total backlog in the quarter, up from 1.3% in the prior year.

“Many homebuyers are on the sidelines, waiting for clarity on the direction of mortgage rates and the overall economy,” Douglas C. Yearley, Jr., chairman and chief executive officer, said in the company’s earnings release.

The company reported a backlog of nearly 8,100 homes valued at $8.9 billion, and projects a midpoint of 8,500 homes to be delivered to the market by next year.

“The contracts in backlog are supported by sizable nonrefundable down payments averaging about $83,000 per home,” Yearley said on the earnings call.

Toll Brothers’ shares are down 30% this year with the the S&P Homebuilders Select Industry Index off about 27% this year.

The Federal Reserve’s aggressive tightening campaign to combat inflation has seen mortgage rates rise, fueling a run-up in borrowing costs and cooling demand after two red hot years for the U.S. housing market.

“We continue to assess and adjust where necessary product offerings, price and incentive levels in each of our communities, taking into account local market dynamics, including elasticity of demand,” Yearly said on the earnings call Wednesday.

Nationally, sales of previously owned homes fell for a record ninth consecutive month in October as climbing mortgage rates pummel the housing market. Contract closings slipped 5.9% to an annualized pace of 4.43 million last month, according to data from the National Association of Realtors.

A man loads pieces of two-by-four wood onto his cart in the lumber section at a home improvement store on August 16, 2022 in Alhambra, California. - Lumber prices have fallen as the US housing market shows continued signs of cooling amid high interest rates. (Photo by Frederic J. BROWN / AFP) (Photo by FREDERIC J. BROWN/AFP via Getty Images)

(Photo by Frederic J. BROWN / AFP) (Photo by FREDERIC J. BROWN/AFP via Getty Images)

Meanwhile, the slowdown has taken a toll on lumber prices, which this week sank to the lowest levels since June 2020.

New home construction continues to drop as builders deal with a retreat in housing demand. Residential housing starts decreased 4.2% last month to a 1.43 million annualized rate, according to government data. Single-family homes started for construction dropped to an annualized 855,000 rate, the lowest since May 2020.

But this pullback in near-term activity also accentuates the challenge that got the housing market into a frenzy over the last two years in the first place: a lack of supply.

“We believe the long-term prospects for the housing market remain positive despite recent weakness,’ Yearley said. “Demographic and migration trends continue in our favor. In addition, there continues to be a substantial shortage of homes in America as housing starts have not kept up with population growth for at least the past 15 years.”

Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv

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