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Luxury homebuilder Toll Brothers (TOL) constructed strong results once again in Q3, beating EPS and revenue expectations, and the outlook is only getting brighter as mortgage rates continue to drift lower. In fact, mortgage rates are sitting at their lowest levels of the year, providing an already healthy new home construction market with another boost. As such, TOL is seeing solid deposit and traffic activity so far in August, giving it the confidence to raise its FY24 home deliveries and adjusted gross margin on home sales guidance.

• TOL now projects FY24 deliveries of 10,650-10,750 homes, up from its prior forecast of 10,400-10,800 deliveries, and adjusted gross margin on home sales of 28.3% compared to its previous outlook of 28.0%. Comparatively, TOL's gross margin on home sales is higher than most of its peers, which is a function of its more affluent customer base and its higher end homes that have an average price tag around $1.0 mln.
  • For instance, D.R. Horton's (DHI) gross profit on home sales in Q3 was 24%, and KB Home's (KBH) was 21.1% last quarter. 
  • To help ease affordability issues, homebuilders have ramped up incentives, including the practice of paying down mortgage rates. However, given that TOL's customer base typically puts down a larger down payment and is better equipped to handle higher mortgage rates, the company can afford to be less aggressive with its promotions.
• While mortgage rates were higher in Q3 compared to where they sit right now, demand was still quite healthy for TOL. Delivered homes increased by 11% to 2,814, slightly above the midpoint of its guidance of 2,750-2,850 units. As has been the case for the last few years at least, a lack of inventory of homes for sale continues to create a supply and demand imbalance in the housing market, pushing buyers towards new construction.
• The cherry on top is that TOL also increased its expected share repurchase total for FY24 to $600 mln from $500 mln, reflecting its confidence in its business prospects and providing the company with another EPS lever to pull. 

The main takeaway is that momentum only seems to be building for TOL as mortgage rates cool off and as the supply/demand dynamics are expected to remain favorable for the new construction market for the foreseeable future.