Will Toll Brothers Earnings Outgrow Pulte Group and Hovnanian?

Toll Brothers (TOL -1.58%) will release its quarterly report on Tuesday, and on the whole, investors have seen the homebuilder's stock hold up reasonably well compared to some of its rivals. PulteGroup (PHM -1.24%) and Hovnanian (HOV -1.83%) have pulled back much more severely so far in 2013, with their shareholders worried about whether the big rebound in home prices will survive higher interest rates or whether another leg down for the housing market could hurt profits one more time.

Toll Brothers has always stood somewhat apart from Hovnanian, Pulte, and many other homebuilders, as Toll aims itself at the luxury-end of the home market. Nevertheless, even high-end buyers have struggled during the housing bust, as a lack of ability for younger families to buy move-up homes has weighed on luxury-home demand. Yet with the tide having turned toward the lower end of the market, is it time for Toll Brothers to enjoy a trickle-up effect? 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 report.

Stats on Toll Brothers

Source: Yahoo! Finance.

What's next for Toll Brothers earnings?
In recent months, analysts have had mixed views on Toll Brothers earnings, raising their October-quarter estimates by $0.04 per share but cutting their full-year fiscal 2014 projections by a penny per share. The stock has risen about 9% since early September.

One sign of strength recently has come from Toll Brothers' resilience even in the face of higher interest rates. In its July quarter, Toll Brothers managed to see net new signed contracts rise at a 26% pace, more than doubling rival D.R. Horton's (DHI -2.97%) pace of growth. What's perhaps most impressive about those gains is that they defied big drops in order volumes at PulteGroup and Beazer Homes (BZH 0.81%), both of which saw double-digit percentage decreases in orders during the same period.

Moreover, Toll Brothers continues to see opportunities to squeeze more revenue out of the improving housing sector. CEO Doug Yearley said that Toll Brothers has sought to raise prices aggressively in order to make the most of the recovery, and even with higher rates boosting financing costs somewhat, luxury buyers seem to have cooperated with that strategy. Indeed, with the wealth effect of rising stock markets generally making buyers more enthusiastic, Toll Brothers should keep getting support as long as the bull market continues.

In fact, Toll Brothers is optimistic enough that it decided to buy the luxury-home unit of Shapell Industries for $1.6 billion. To help raise cash for the deal and support its balance sheet, Toll Brothers issued about $200 million in stock in a secondary offering last month. Yet the move didn't seem to weigh much on the stock's price.

The challenge Toll Brothers faces is that the East Coast hasn't been quite as strong in its price-recovery than other areas of the country. That similar to the trouble that Beazer Homes faces, because most of the region hasn't shown very strong growth. By contrast, D.R. Horton arguably has a stronger presence in the red-hot Southwest and Florida.

In the Toll Brothers earnings report, look closely to see if the company gives guidance about whether the home market seems to be improving or worsening. If the latest spike in mortgage rates only now starting to get serious, it could be next quarter before Toll Brothers sees any downward pressure from affordability concerns -- if indeed it ever does.

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