Homebuilding company Toll Brothers (NYSE:TOL) missed Wall Street’s revenue expectations in Q4 CY2024, with sales falling 4.6% year on year to $1.86 billion. Its GAAP profit of $1.75 per share was 14.4% below analysts’ consensus estimates.

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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

A company’s long-term performance is an indicator of its overall quality. While any business can experience short-term success, top-performing ones enjoy sustained growth for years. Thankfully, Toll Brothers’s 8.4% 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.

We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Toll Brothers’s recent history shows its demand slowed as its annualized revenue growth of 2.4% over the last two years is below its five-year trend.

We can dig further into the company’s revenue dynamics by analyzing its backlog, or the value of its outstanding orders that have not yet been executed or delivered. Toll Brothers’s backlog reached $6.94 billion in the latest quarter and averaged 2% year-on-year declines over the last two years. Because this number is lower than its revenue growth, we can see the company hasn’t secured enough new orders to maintain its growth rate in the future.

This quarter, Toll Brothers missed Wall Street’s estimates and reported a rather uninspiring 4.6% year-on-year revenue decline, generating $1.86 billion of revenue.

Looking ahead, sell-side analysts expect revenue to grow 3.6% over the next 12 months, similar to its two-year rate. While this projection implies its newer products and services will spur better top-line performance, it is still below the sector average.

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Operating Margin

Toll Brothers has been an efficient company over the last five years. It was one of the more profitable businesses in the industrials sector, boasting an average operating margin of 15.3%. 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 9.4 percentage points over the last five years, as its sales growth gave it immense operating leverage.

This quarter, Toll Brothers generated an operating profit margin of 11.8%, down 4.1 percentage points year on year. Since Toll Brothers’s operating margin decreased more than its gross margin, we can assume it was recently less efficient because expenses such as marketing, R&D, and administrative overhead increased.

Earnings Per Share

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Toll Brothers’s EPS grew at an astounding 31.5% compounded annual growth rate over the last five years, higher than its 8.4% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

Diving into the nuances of Toll Brothers’s earnings can give us a better understanding of its performance. As we mentioned earlier, Toll Brothers’s operating margin declined this quarter but expanded by 9.4 percentage points over the last five years. Its share count also shrank by 27.2%, and these factors together 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 shorter period to see if we are missing a change in the business.

For Toll Brothers, its two-year annual EPS growth of 12.3% was lower than its five-year trend. We still think its growth was good and hope it can accelerate in the future.

In Q4, Toll Brothers reported EPS at $1.75, down from $2.25 in the same quarter last year. This print missed analysts’ estimates, but we care more about long-term EPS growth than short-term movements. Over the next 12 months, Wall Street expects Toll Brothers’s full-year EPS of $14.53 to stay about the same.

Key Takeaways from Toll Brothers’s Q4 Results

We struggled to find many positives in these results. Its revenue missed significantly and its EPS fell short of Wall Street’s estimates. Overall, this quarter could have been better. The stock traded down 4.7% to $116.25 immediately after reporting.

Toll Brothers’s earnings report left more to be desired. Let’s look forward to see if this quarter has created an opportunity to buy the stock. When making that decision, it’s important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it’s free.