Toll Brothers' October Surprise

It looks like October's massive upheaval in the credit markets will continue to pressure the housing market as home prices continue to fall and builders' revenue drops.

Toll Brothers' (TOL) fourth-quarter revenue sank 41 percent to $691 million from a year ago as cancellations heated up. Via Bloomberg:

"Unfortunately, the preliminary signs of stability we had discussed in early September were upended by the past month's financial crisis,'' Chief Executive Officer Robert Toll said in the statement. Credit market disruption and falling stock prices have helped drive "home-buyer confidence and our traffic and demand down to record lows.''

Problems at Toll and other homebuilders aren't going away, even with lots of investors eyeing their cheap multiples and several (failed) mini-rallies in the sector over the past few weeks.

Toll's cash flows tightened again during October after stabilizing a bit the month prior, with net cash flows shrinking by more than half to $128 million from the prior quarter, according to Goldman Sachs. Like other troubled companies, Toll called for government assistance.

Strategist Brian Belski of Merrill Lynch warned this week that homebuilder stocks are still pricier than during the last housing downturn in the early 90s, and that this bust is worse.

The wait for a bottom continues.

Comments

[SteveD64:]

I think by the end of 2009 most if not all public homebuilders will be gone. The home building business is one that does not lend itself to being a public company.

They make a lot of money being able to produce a large amount of homes and sell them at a nice price. Those large developments are so overbuilt now it will take a decade for that need again, if ever. Also, the cities are going to be very reluctant to allow such massive development and then they are left to adminster the downside of the results.

The Toll Bros., Centex, Beazer, etc cannot compete with the smaller local builder who can move quicker and is established in the local area.
Their overhead/management levels add too much to the cost.

Homebuilding is one of the few industries that a small local guy can compete with a national public company on an equal basis. Each house is unique unto itself.

I think they are better to "hookup" with a hedge fund as a private company. This provides them with a large financial partner and removes the unreliable public financing sources.

Also, always remember, homebuilders are not in the real estate business. They are in the manufacturing business. No different than Sony, Dell, or Toyota

2008 Nov 12 06:52 PM