Toll Brothers' Crystal Ball

Can you really take a company's yearly guidance seriously? Who can predict future events a year from now? It's so hard most companies skip the ordeal. Who can blame them? So many unforeseen events can derail a company's guidance. Yet, a few daredevil companies continue giving their year outlook. As far as I'm concerned, that's akin to writing the front page of next year's Wall Street Journal. I've already highlighted how Caterpillar (CAT) and Parker Hannifin (PH) - two excellent companies - almost never get their yearly guidance right.

So who really has the crystal ball? Who gets it right year after year in both miserable and wonderful economic times. How about Toll Brothers (TOL), the luxury homebuilder? This highly cyclical company hits its outlook just about every time. Each December, Toll gives its outlook as to how many homes it will sell and at what average selling price. Remarkably, the home builder almost always makes good on its prediction. That's crazy-brilliant forecasting. Toll gave accurate forecasts during the 2008 and 2009 housing debacle. And better still, Toll's results usually come in at the top of guidance for a nice upside surprise.

Here are their unit forecasts, which are uncannily accurate - all the more remarkable considering Toll gives them a year early! Toll usually gives 800 unit ranges. Note how deliveries have been coming in toward the upper limits of the ranges given.

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(Sourced from 10Qs.)

Here are their average sales prices predicted a year early. The outcome: Another forecasting tour de force. Except for 2009, Toll has been hitting the upper end of its range.

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(Sourced from 10Qs)

This year, they are forecasting a 14! to 31% increase in homes sold and a 4 to 10% increase in average selling prices - a startling growth prediction. In view of its past performance in meeting its outlook, you can bank on Toll Brothers numbers. The home builder has earned the street creds to deliver on its promises.

Toll Updates Its Guidance

After its first quarter, Toll narrowed its forecast from 3600 - 4400 to 3750 - 4300 delivered homes, still at an average selling price of $595,000 to $630,000. The new guidance translates into $2.23 to $2.71 billion of revenue for FY 2013. Removing the $424 million Toll reported for Q1 leaves $1.8 to $2.3 billion in revenue for the rest of the year, about 15 to 47% more than last year.

Very few companies increase sales like that. Even fewer, can make promises they can keep. Toll is one of those few that does both.

The Backlog Tells The Story

Toll's backlog has been increasing. The backlog - the value of homes under agreement but not yet delivered - has been increasing. At the end of FY 2012, Toll's backlog value was 72% greater than a year ago. You'll note it's increasing at a faster rate than during the housing boom period of 2003 - 2005.

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Toll Brothers has lagged the other home builders. Trailing PE is 10.8 and Price/Tangible Book is 1.7. Yesterday's 7% drop gives investors an excellent entry point.

Disclosure: I am long TOL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)

Additional disclosure: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.