The year 2018 has been a disappointing for the Building Products – Home Builders industry and Toll Brothers, Inc. (NYSE:TOL) is no exception. Year to date, the stock has decreased 30.9% compared with the industry’s collective decline of 35.8%.
Apart from Toll Brothers, homebuilders like PulteGroup, Inc. (NYSE:PHM) , Lennar Corporation (NYSE:LEN) , D.R. Horton, Inc. (NYSE:DHI) and KB Home (NYSE:KBH) have suffered this year. Let’s focus on Toll Brothers and find out what is hurting the stock.
Decline in New Order: A Major Concern
Despite reporting better-than-expected results in fourth-quarter fiscal 2018, investors sentiment was hurt by decline in new orders. In the reported quarter, this Zacks Rank #4 (Sell) company’s new order declined for the first time in four years. Contracts in the quarter decreased 15% in dollars and 13% in units. Notably, California witnessed the biggest decline in contracts. Per community, contracts fell to 5.8 in the fourth quarter compared with 10.4 in the prior-year quarter.
Headwinds like rising interest rates and higher home prices in the housing market might have hurt investors’ sentiments. For first-quarter fiscal 2019, the company expects home deliveries between 1,350 units and 1,550 units (1,423 units were delivered in the prior-year quarter) at average price of $850,000-$880,000 (versus $826,000 a year ago).
Material Costs Woes Linger
Increasing building materials and labor costs are hurting the company’s margin significantly. Land prices are inflating due to limited availability. This, in turn, might dent homebuilders’ margins in the forthcoming quarters. Moreover, the recently imposed tariff on imported steel and imported aluminum raises concern. An increase in import tariff will escalate raw material cost for home builders, who are already grappling with increased cost, thanks to the recent imposition of lumber tariff.
Several years of production deficits during the housing downturn limited the supply of both rental and new homes in the country. At present, a shortage of buildable lots, skilled labor and available capital for smaller builders are limiting home production, thereby lowering the inventory of homes, both new and existing.
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