On August 18, Toll Brothers (NYSE:TOL) posted fiscal third-quarter earnings that captured the split personality of today’s housing market: fewer completed sales, thinner margins, but a growing pipeline of buyers willing to sign contracts anyway. Net income slid to $280.1 million, or $2.97 per diluted share, down from $369.6 million and $3.73 a year earlier. Yet net signed contracts actually climbed to $2.52 billion, up from $2.41 billion, a sign that demand for the builder’s luxury homes has not disappeared, even if it is arriving on tougher terms.
Buyers Keep Showing Up
Toll Brothers signed $2.52 billion in net contracts during the quarter, covering 2,508 homes, up from $2.41 billion and 2,388 homes a year earlier. That happened as the company grew its community count to 471 open communities, compared with 420 a year ago, and management still expects total community count to rise 8% to 10% for the full fiscal year, with similar growth penciled in for fiscal 2027. Cancellations moved the other way: they fell to 2.6% of beginning backlog, from 3.2% a year earlier, and to 5.4% of signed contracts, from 7.5%.
The company kept sending cash back to shareholders too. It repurchased roughly 1.4 million shares at an average price of $148.63 apiece, spending $206.8 million in the quarter, and paid a $0.26 per share dividend on July 24. That brought year-to-date shareholder returns to $506 million, and management raised its planned fiscal 2026 buyback total from $650 million to $700 million. The balance sheet backs that up. Toll Brothers ended the quarter with $1.06 billion in cash and $2.24 billion available on its revolving credit line, while its debt-to-capital ratio improved to 24.5% from 26.0% at the end of fiscal 2025. Stockholders’ equity grew to $8.53 billion, pushing book value per share to $92.36 from $87.25. Full-year guidance held steady at roughly $10.5 billion in home sales revenue and a 26.1% adjusted gross margin, and Fortune named Toll Brothers its most admired homebuilder for the ninth straight year.
Where The Margin Went
Profitability told a different story this quarter. Net income fell to $280.1 million from $369.6 million, and pretax income dropped to $374.8 million from $499.5 million. Income from operations fell to $359.2 million, just 13.5% of total revenue, compared with 16.6% a year ago. Home sales gross margin compressed to 23.9% from 25.6%, and the adjusted version, which strips out interest and inventory write-downs, slipped to 25.6% from 27.5%. Selling, general and administrative costs climbed to 10.0% of home sales revenue from 8.8%, eating further into what was left.
The quarter’s deliveries also shrank. Toll Brothers closed on 2,662 homes worth $2.65 billion in revenue, down from 2,959 homes and $2.88 billion a year earlier, and its backlog fell to $6.24 billion and 5,312 homes from $6.38 billion and 5,492 homes. Impairments added to the pressure. The company booked $17.7 million in inventory write-downs, $10.1 million in land-related impairments, and a $39.6 million impairment tied to its unconsolidated joint ventures, a charge that did not exist a year ago. Land holdings edged lower too, with roughly 75,500 lots owned and optioned, down from 76,800 both a quarter earlier and a year earlier.
What The Market Sees
Hedge fund ownership of Toll Brothers fell to 49 funds from 59 in the prior quarter, which points to institutional buyers trimming rather than adding to the name. Short interest sits at 4.95% of the float, a level that suggests a real but not overwhelming bear camp. The stock trades at a forward price-to-earnings ratio of 10.45 as of September 4, a multiple that prices in little of the growth story management is still pointing to. That combination hints at a market more worried about near-term margins than convinced by the contract growth.
A Split Verdict Looms
Toll Brothers enters the fourth quarter with reaffirmed full-year guidance, a growing community count, and a buyback plan it just made bigger, evidence that management still trusts the demand side of the business. But shrinking margins, a smaller backlog, and a fresh joint-venture impairment show the cost of holding onto that demand has gone up. For the growth case to hold, contract momentum and community expansion need to turn into deliveries without further margin erosion.
READ NEXT: 10 Best Future Stocks to Buy Under $10 and 12 Best Performing Semiconductor Stocks to Invest In.
Hedge Fund Resource Center