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Toll Brothers Doubles Profit On Higher Home Prices, Says More Demand Is Still To Come

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Luxury home builder Toll Brothers doubled its profit and grew its revenue by more than 50% during the third quarter, the company reported Wednesday morning. In attributing the surge to higher home prices and deliveries, Toll Brothers executives painted a picture of a housing market that is slowly and sometimes choppily recovering but still has room to grow, pointing to "pent-up demand [that is] still yet to be unleashed." Paired with the recently-reported rises in home builder confidence and pending home sales as well as a Wednesday-morning upgrade for hardwood flooring company Lumber Liquidators, it would appear that the Toll Brothers forecast is entirely realistic.

Toll Brothers reported $1.06 billion in third quarter revenue, up 53% from the $689.2 million in revenue reported this time last year and easily beating the $979 million Street consensus. The company delivered 1,444 units for the quarter, up 36% from the year-ago quarter. Net income came in at $97.7 million, or 53 cents per share, more than double the $46.6 million, or 26 cents per share, reported as net income and earnings in the year-ago quarter. The 53-cent per-share profit also beat the analyst consensus by 7 cents.

While net signed contracts were down 6% compared to the year-ago period, the company reported that the average price of homes delivered was $732,000, compared to $651,000 this time last year, and that the average price of homes in backlog was $737,000, up from $709,000 this time in 2013. These price increases helped boost the overall earnings results.

"Although we have seen some lessening of pricing power in the past year, we have not felt the need to incentivize to spur home sales. Because we generally do not build 'spec' homes, we are not under pressure to move standing inventory," Toll Brothers CEO, Douglas Yearley, said in a statement Wednesday morning. He went on to say that he sees pent-up demand that has yet to be unleashed and that he is especially pleased with the company's performance in markets like Coastal California, Texas and urban New York City.

For his part, executive chairman Robert Toll noted that "without real urgency pushing buyers to make a decision, general industry demand continues to be impacted by uncertainty about the economy and world events, improving but fragile consumer confidence and reduced affordability due to rising prices and limited personal income growth" and that the industry should be building 50% more homes this year than its current pace to meet an increased population. The good news, according to Toll, is that "at some point, this pent-up demand will be released, which will add momentum to the entire housing market."

Looking ahead to the rest of 2014, Toll Brothers said that it expects to deliver between 1,710 and 1,910 homes in the fourth quarter, and that the average price for homes delivered in full-year 2014 will work out to somewhere between $710,000 and $725,000 per home. This would produce full-year revenue of between $3.76 billion and $3.99 billion, up from $2.67 billion in 2013 full-year revenue.

In related home-building news, Wedbush Securities upgraded hardwood flooring company Lumber Liquidators Wednesday morning, raising its rating from neutral to outperform and upping its price target by $11, to $73. Providing rationale for the upgrade, Wedbush analyst Seth Basham wrote, "Key macro leading drivers such as existing home sales are improving along with the weather, while competitive pressures from the likes of Home Depot are unlikely to get significantly worse in 2015, providing sales support. We believe the second quarter marked the bottom for Lumber Liquidators' underperformance versus the industry and expect comp growth near industry trend levels in 2015."

Lumber Liquidators opened higher as a result of the upgrade, and is trading around $58 per share in early Wednesday action, a 4.8% gain. Year-to-date, the stock is down 46%. Toll Brothers, meanwhile, ticked up about 0.4% in pre-market action but turned downward quickly after the opening bell rang. Shares are currently down nearly 2%, indicating that investors are looking more at the 6% decrease in net contracts signed than the more-than-doubled profit.

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