Toll Bros. stock price surges on big gains in new-home orders

California cooled somewhat, but the South and mid-Atlantic are heating up for Horsham-based Toll Brothers, leading investors to bid up the stock by more than 13 percent Tuesday.

"Toll's South and Mid-Atlantic regions surged," wrote Raymond James analyst Buck Horne in a note to investors, with new order growth of 25 percent and 15 percent year over year, respectively.

Toll's stock price closed at $39.52 Tuesday, a 13.79 percent increase. The rise was all the more notable since Toll shares have languished this year along with those of other national home builders, due in part to lack of inventory for younger buyers and to lumber price tariffs imposed by the Trump administration.

Total new contracts were down 4 percent year-over-year in formerly red-hot California, but communities there were still performing well above company averages, with 10 homes per community vs. the average of 8.1 new homes, and new order pricing still rising 4 percent year over year, executives said.

On a conference call, Toll CEO Doug Yearley said the California numbers last summer were "unique. We saw an acceleration of sales, which typically doesn't occur. This year, we've gone back to a normalized" rate of sales in both northern and southern California.

"We're exceeding company averages in sales per community, and we're very happy with operations in California. Overall, there are no sub-markets I'm worried about" in the western state.

Toll Brothers accelerated its stock buybacks this year. With the share price weaker since the start of 2018, Toll management "took advantage by accelerating its repurchase activity," Horne said, buying back 3.7 million shares for roughly $136 million during its fiscal third quarter, which ended July 31.

Year-to-date, Toll spent $438 million on buying back 10.2 million shares, or 6 percent of its beginning share count, at an average price of $43.05.

Down south, Yearly cited Dallas and Austin as growth cities in Texas.

"When I look to the South, the one market that has the lower-priced homes is Jacksonville [Fla.], a relatively small market for us, but it has performed well. I would say in our lower-priced offerings focused on leading-edge affluent millennials have had a small impact on strong sales in the South," Yearley added.

Rising commodity prices have hurt all builders, but Yearley said the "best news of late is lumber prices are coming down. That will not translate into lower costs for some time, because our houses take nine months, plus or minus, to build. Most lumber goes into the front end of construction. But over the next six to nine months, we're encouraged by the drop in lumber prices. That's offset with continued cost creep on the labor side and other materials," Yearley said.

All in all, Wall Street analysts sounded pretty content with the third-quarter results: Toll reported a 27 percent increase in quarterly revenue and an 18 percent gain in signed contracts per Toll housing community. The value of the builder's backlog at the end of last month was $6.48 billion, up 22 percent and "the highest at third-quarter end in a dozen years," Toll chief financial officer Marty Connor said in a statement.

Toll Brothers' fiscal 2018's nine-month net income totaled $437.2 million, or $2.81 per diluted share, compared with FY 2017's nine-month net income of $343.6 million, or $2.01 per share. Nine-month pretax income was $537.4 million, compared with 2017's nine-month pretax income of $512.6 million.  Nine-month revenues totaled $4.69 billion and 5,555 units, up 24 percent in dollars and 18 percent in units, compared with fiscal 2017's nine-month period totals of $3.79 billion and 4,727 units.

Toll became a public company in 1986 and builds what are known as move-up, empty-nester, active-adult, and second homes, as well as urban and suburban communities. It operates in 22 states: Arizona, California, Colorado, Connecticut, Delaware, Florida, Georgia, Idaho, Illinois, Maryland, Massachusetts, Michigan, Minnesota, Nevada, New Jersey, New York, North Carolina, Pennsylvania, Texas, Utah, Virginia, and Washington, as well as in the District of Columbia.