Is Toll Brothers Inc. (TOL) Building for a Strong Quarter?

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Toll Brothers Inc. (TOL) is a luxury home designer and builder based out of Pennsylvania. The company also draws revenue from its ownership and operation of various golf courses and country clubs tied in with its suburban luxury home developments. At the time of this post (10:30AM CST), TOL is currently trading at 34.80, up 0.58% on the day. The stock is within the upper half of its 52 week trading range of 28.98-39.95, and has rebounded well off of the yearly lows printed in early October. TOL is scheduled to report fourth quarter earnings pre-market tomorrow, 12/10/2014.

Historically over the last eight quarters of earnings reports from TOL, the stock has traded with mixed to negative reactions, moving lower five out of eight sessions immediately following the EPS release, with an average historical post-earnings directional move during this time period of 2.7%. Currently the options market is pricing in a slightly larger than average move of about 4.60% based on the current pricing of the ATM straddle. This anticipated move by this week’s weekly options expiration would impute a move up or down of around $1.60 in the underlying stock. Despite historically mixed to bearish investor reactions to TOL earnings reports over the last eight quarters, I will maintain my bullish bias on the name going into the report tomorrow. Toll Brothers released positive preliminary numbers on November 10th, indicating increases in both revenues and future orders. Additionally from a technical standpoint, the stock remains in a bullish consolidation pattern on the daily chart, well above the upward sloping Ichimoku Cloud and all relevant moving averages. Bullish lean intact, I will be looking to get long this name into earnings tomorrow morning.
Trade: Buying the TOL Dec 12th Weekly 35.5-36.5 Call Spreads for $0.25
Risk: $25 per 1 lot
Reward: $75 per 1 lot
Breakeven: $35.75

Andrew Keene

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