Will Toll Brothers Boom in Housing's Recovery?

On Wednesday, Toll Brothers (TOL -0.69%) will release its latest quarterly results. The key to making smart investment decisions on stocks reporting earnings is to anticipate how they'll do before they announce results, leaving you fully prepared to respond quickly to whatever inevitable surprises arise. That way, you'll be less likely to make an uninformed, knee-jerk reaction to news that turns out to be exactly the wrong move.

The housing market has started recovering much more quickly in recent months, making investors incredibly optimistic about the prospects for Toll Brothers and its homebuilding peers. But have the industry's stocks gotten ahead of their fundamentals? Let's take an early look at what's been happening with Toll Brothers over the past quarter and what we're likely to see in its quarterly report.

Stats on Toll Brothers

Source: Yahoo! Finance.

Will Toll Brothers see an earnings rebound this quarter?
Analysts haven't shared the general enthusiasm about housing in their earnings estimates on Toll Brothers, having slashed their April-quarter estimates by nearly two-thirds and cutting $0.16 per share from their full-year fiscal 2013 consensus earnings figures. The stock also hasn't moved very far lately, falling about 1% since mid-February.

Enthusiasm among homebuilders has been extremely strong lately, as favorable data on the housing front has lifted many stocks substantially in recent months. Late last month, D.R. Horton (DHI -1.29%) saw sales jump nearly 50%, as profits jumped nearly 175% in its most recent quarter. Smaller builders like Hovnanian (HOV -1.02%), which suffered disproportionately hard during the housing bust, have recovered the most sharply. Hovnanian's stock quadrupled in 2012, and while it's down a bit year to date, it has still held onto massive gains compared to its peers.

But Toll Brothers hasn't seen nearly the magnitude of gains that its fellow homebuilders have enjoyed. In its fiscal second-quarter results announced in February, Toll Brothers fell short of expectations despite seeing signed contracts rise by 49%. Although the company noted increased demand and building momentum in its business, average selling prices fell 2%, and investors have held back on Toll Brothers and favored other, smaller homebuilder stocks.

Interestingly, Toll Brothers has decided to move beyond outright sales to promote luxury rentals. In a partnership with AECOM's (ACM 0.14%) Capital investment fund, Toll Brothers announced last month it would develop a 417-unit rental tower in Jersey City, with leasing expected by early 2015. The building is the first of a planned complex that will include 925 residential units, along with a performing arts center, retail space, and a pedestrian plaza. Given Toll Brothers' focus on luxury, catering both to renters and buyers makes sense for the company.

In Toll Brothers' report, look at whether the company is able to sustain growth at rates similar to what middle-end homebuilders have managed lately. If the luxury end of the housing market is struggling, it could have ramifications not just for Toll Brothers but for the U.S. economy as a whole.

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