Toll Brothers: Are They Serious? 19 comments
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So let me get this straight. Yesterday morning, Toll Brothers (TOL) reported its worst fiscal year in twenty years as a public corporation and its shares rallied as much as 15% during the day. However, eventually the shares could not fight the negative direction of the broader market, finishing up nearly 7%. With most of the major market indices falling about three percent or more for the day, you might wonder what caused the rally in TOL shares.
It was not the luxury homebuilder’s performance during the quarter that propelled the stock. On the contrary, analysts had estimated Toll Brothers would lose $.47 per share for the quarter, but the company turned in a loss of $.49 per share. Some analysts optimistically called this “a narrowing of losses” considering that TOL lost $.52 per share in the fourth quarter of 2007. I would point out that the company lost more than $300 million dollars for the year, which is not exactly inspiring. Revenue for the fourth quarter was down 40% from last year to $698 million. On November 11, Toll Brothers reported that its backlog of business has fallen 54% and that signed contracts are down 27%. To be fair, everyone knows that homebuilders – especially luxury homebuilders – are enduring one of the most dreadful operating environments in history.
So, can one attribute yesterday’s TOL rally to upbeat guidance for the year ahead? No – Toll Brothers did not offer financial guidance for 2009! I do not blame the company for its reticence given the substantial amount of uncertainty regarding the economic prospects for 2009. The company did say that it anticipates building between 2,000 and 3,000 homes in the next year with an average price of $600,000-$625,000. In comparison, the company sold 4,743 homes in the past year. Furthermore, the most recent National Association of Homebuilders’ survey showed the lowest confidence level regarding builder’s near-term prospects in the survey’s history. According to the AP, in the most recent quarter, median home prices fell 9% and 40% of all homes sold were sales on bank foreclosures.
Something must have sparked TOL’s rally and I have established that it was neither the company’s recent performance nor bright near-term prospects. So, I am left with to conclude that there must be some sort of external event causing newfound bullishness in the stock and these days that often means government is getting involved. Sure enough, word on Capitol Hill is that the government plans to artificially lower mortgage rates in order to entice new home buyers. It might be déjà-vu but I think we have seen this before and how did that work out?
The government’s imposition of a rate of 4.5% on 30-year mortgages will most definitely attract a new throng of buyers but is this really the answer to the housing crisis? The short answer is: no. As I have documented in previous posts about Toll Brothers (Home Builders: Not Finding Buyers Here and Toll Brothers CEO Warns of More Trouble Ahead), CEO Bob Toll has been asking for a government bailout for the homebuilders for about six months now. Back in June, few took Mr. Toll seriously and thought his plea was simply a diversion from his company’s woeful performance. Well mission accomplished; if this proposal is enacted, a bailout for homebuilders is exactly what we will have. All of this for a company whose stock is in positive territory thus far in 2008, meaning it has outperformed the market indices by more than 40%! That is pretty remarkable for a company that has just been through its worst fiscal year in its entire history as a public corporation. Does that sound like an industry that needs propping up? Once the government snowball starts rolling, look out below!
I suspect we will be dealing with a new housing bubble down the road, as prices always seek equilibrium and will not be buoyed by governmental intervention forever. As I wait for the other shoe to drop, Ockham Research rates TOL Overvalued because I see very little compelling reasons for optimism in its crumbling fundamentals. There are far better stocks to invest in right now that actually have improving fundamentals and have been unjustly beaten down in this bear market.
For a further bearish indicator, see Jim Cramer’s interview with Bob Toll on last night’s Mad Money (link). Cramer gleefully congratulated Toll on his company’s “beautiful balance sheet” as they discussed the future of housing. They skipped over the disappointing earnings as Cramer claimed that no one looks at those numbers anymore. Then they raved about the newfound affordability in housing after legislative action to artificially lower mortgage rates (to the direct benefit of Mr. Toll) yet failed to even consider the possibility that this could all backfire down the road. What really got to me was Mr. Toll not once, but twice calling on Congress and the Fed to start marketing this mortgage rate to the public. He really must believe that the government works for him, and unfortunately he may turn out to be right.
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This article has 19 comments:
Did you really expect Cramer to show any due diligence? After all his primary paid for function on CNBC iappears to be network jester...
The ironic thisng about the bailout is that this will hurt the strong builders in the future as the weak companies will be kept alive. When times finally get better there will again be a glut of inefficient companies all competing against each other. Toll would be better off telling the government not to bailout the housing industry. Toll has a strong balance sheet and would survive while many of their competitors would not. This would have eventually been a boom for Toll. How foolish of Bob Toll to think so short term and beg for money.
Our founding fathers are rolling in their graves to see such action by our government. The country was built on capitalism. Shame on the government for these bailouts and shame on them for destroying the country. Let me add one more shame.....Shame on the people (AKA taxpayers) for voting these incumbents back in. That is the biggest disgrace.
I have been stunned by Bob Toll's willingness to ask for government assistance - why should the government assist luxury homebuilders?
The better run homebuilders have ample cash to ride out the downturn and will to a good job picking up land that smaller local buiders lose in bankruptcy at fire sale prices. Becasue the basis in their land has been written down, they should easily turn a profit in the early stages of a housing recovery.
Remember the last time the Cramer/Toll pump and dump show was on and Bob Toll said he was buying shares at 35.00 while he was selling them at 35.00, of course many are willing to let Cramer crap on their portfolio one more time. Those guys should be in jail.
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ceotalk.blogspot.com
1) There is relatively low available/tradeable float of the stock. Short squeezes are far more effective than momentum pressure in this issue.
2) The Abu Dhabi Investment Authority (ADIA) scrambles up the efficient market making in this stock as a volatility toy to play with, complementary to its sizable holdings of the stock.
Whether this creates an ally for Bob Toll without having to seek it, is an interesting point for the exchanges and the SEC to investigate the manipulation inherent. What are the odds of that happening?
We will be up another buck on Monday!
RE.porter
Check the Form 4's.
Now the stock is in the dumps and the shareholders don't have enough $$ to enrich this guy further, so he wants to turn to the US government for his next windfall.
Despicable.
And Cramer's and CNBC's other hero, Ara Hovnanian and his family cashed out nearly as much in the 2005- 2006 period and you can't see him on the air unless he's shilling for a government handout too.
Also despicable.
It would be nice if the Congress that is considering the bailout of the housing industry asked Mr. Toll about that.
Unlike past recessions that hit blue collar workers hardest we are now confronted with large layoffs of white collar workers from the financial services
industry.
Throwing $ at home builders does nothing to address the root of our floundering
economy which is excessive consumer and public debt .
Better to drastically force reductions of credit card interest rates and forgive some accrued interest so the population will be better able to afford the basics
until some sense of normalcy returns.
America needs to again become a producing nation. The flirtation with the idea that we can somehow prosper as an information based society is flawed.
Rather than propping up failed models we to need to cultivate new industries that can not be exported.
There are a myriad of struggling innovative environmental and medical tech companies that are deserving. We can generate real jobs in new industries and
jump start the economy by upgrading our crumbling waste water systems bridges, roads and electrical grid while we wait
The reflation of the credit bubble requires two halves of the equation to work. You must have a willing lender and you must have a willing borrower. The gov't is trying to artifically incentivize both sides of this equation but as the taxpayer is hung with a larger and larger bill while the home prices continue to plummet congress will eventually say "STOP". It is already happening with the 750 bn bank bail out. 1/2 the money has already been literally pissed away and the economy has only gone into faster freefall. The very leaders that demanded we do this else it would be the end of the world are now saying they do not want to give Paulson the 2nd 1/2 of the money.
At the same time, the banks are holding on for dear life so they will resist getting any of their own skin in the game. Any deal they do will have to have a gov't backing such that they cannot lose money because they know that loaning money on bubble housing is a bad deal now.
On the buyer side (the guy that we need to accept the debt for this reflation to work), if I buy a 650k house that is going down in value by 5%-15% or more per year then it does not matter if the interest is free, I still will not buy the home. Right now we see a lot of people jumping on foreclosures thinking they are getting the deal of a lifetime. The same thing happened in 1930 and 1931. All they were really doing was catching the falling knife. Housing must plummet to 1995 levels before it will bottom because the rapid run up since that time was an unsustainable mania and manias always correct to a lower level than where they started.
TOL is still bubbled up because people think the rich will weather this storm better than others. The truth is that the affluent gained a lot more percentage wise than the ordinary man and so he will lose a lot more during the bust than the common man. Notice that the big banks are crashing a lot harder than smaller banks and credit unions. Notice that hedge funds (which were always limited to high net worth investors) are literally falling apart and many have stopped redemptions (i.e. people's money is locked up out of their reach and now they have to watch it all vaporize a-la-1929->1933). We are now in the phase where the bigger they are the harder they fall. Also, TOL is not taking write offs that they should which is why their fake balance sheet still looks good to the sheeple. This is going to be a $5 stock.
Maybe the Toll brothers are a couple of cool, crazy P.T. Barnum disciples and then again, maybe they are investment gurus.
You wont know until you invest a substantial amount into their financial vehicles and wait to see what happens.
Dass wurde Toll sein Mann, total Toll.
"Obviously there are enormous challenges in our industry,"
ceotalk.blogspot.com
But what`s really surprising is the good performance this stock had recently. Is it a buy here?
Obama for change.......