Toll Brothers (TOL): The Struggle Continues

Toll Brothers (TOL) alluded to another painful quarter as the luxury homebuilder expects to take another bigger than expected write-down, this one in the neighborhood of $90 to $160 million. The company issued its earnings outlook ahead of the official release two weeks from today, and Toll said that revenue has slipped 51% in the quarter.

“Luxury home builder Toll Brothers reports 2Q revenue of $398 million, that’s still 51% year-ago levels.” CNBC’s Squawk Box 5/20/2009

Closings were down 47% from a year ago, and the backlog of business fell 55%. The bright spot in the release was the fact that the company has increased its stockpile of cash to about $2 billion, a stunning $12 per share. This is a certainly a surprise as the company is projected to lose about $1.40 in fiscal 2009, and they are writing down the value of assets each quarter. I have not heard of major asset sales, so the increased cash on hand must be reflective of the $400 million worth of notes they issued in April. So, the cash hoard was not generated organically, and has added to Toll’s long term debt.

The stock has risen close to 3% in morning trading, which suggests the market is feeding off of Chairman and CEO Bob Toll’s remarks that suggest the worse is likely over in the housing market.

“With interest rates at an historic low, home price affordability at an historic high and consumer confidence starting to improve, we believe that more buyers are beginning to enter the housing market…Despite a weak economic and employment landscape, which was reflected in fiscal 2009’s second-quarter contracts, we have a few reasons for cautious optimism. The most encouraging is our recent deposit activity.”–Bob Toll

Mr. Toll is correct to be cautious with his optimism, as just two days ago housing starts activity reported a record low for April. In addition, April foreclosures were at a record pace as well. There is still an oversupply of homes for sales it has just a shifted the supplier from home builders to banks holding foreclosed homes. The worsening trend in foreclosures should give pause to anyone who thinks the housing market has certainly bottomed because foreclosures are bad for two reasons: they are destructive to demand as those foreclosed upon are very likely taken out of the buying pool and foreclosures increase supply at a time where there is already an imbalance.

At Ockham, we are confident to reaffirm our Overvalued rating on Toll Brothers because the price is still too high for the greatly eroded fundamentals. Toll Brothers, whose stock one would think would be very effected by current market conditions, has been largely resilient thus far. The stock is only down 27% from its 52-week highs, even as revenue and earnings are disappearing. Furthermore, Toll is a luxury homebuilder which will be a tough place to be for some time, as home values have declined on existing homes making them even better competition. So, even if the worst is over, which it may be, we think there are better stocks to take advantage of the recovery.

Toll Brothers: The Struggle Continues

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