May 22. 2018

On Tuesday, the S&P 500 was down 0.3% while Toronto was down 0.1%.

Canadian Western Bank was up 1.6%. Perhaps the market is starting to give some credit for the higher oil prices.

Toll Brothers was down 9.6% after reporting earnings. Despite many positives in the earnings report, the Analysts were concerned about the lower gross margin. Revenues were up 17%. However, cost of sales were up 20.5%. The company indicated that this was due to three factors:

Labour and particular lumber costs have increased

Some “inventory” (condos) in New York were sold at discounted prices in order to obtain the cash and put it to better use.

About 15 higher margin and very expensive home sales in California were delayed into Q3.

Even though costs increased faster than revenue, gross margin was up 5%.

But selling, general and admin expenses were up 13.6%.

Income from operations was down 3.5%. Meanwhile though, the share count was down 9%.

Income from unconsolidated entities was down very sharply as it had been usually high the prior year and this tends to be a lumpy line item.

Toll Brothers forecasts that margins will improve noticeably in the next two quarters, It may be that analysts do not believe this.

I listened to the full conference call. I may be biased but I heard a lot of positive things about growth. Overall I don’t see why the earnings report justified a near 10% drop in the share price.

Recent quarters have exhibited very strong earnings growth. This quarter had reasonably strong revenue growth but the adjusted earnings per share was about flat. It appears that earnings per share growth should be strong in the next two quarters.

This stock has been volatile at times. I remain confident that this stock offers good value, although of course there are never any guarantees.